Fitch Ratings has assigned UAE-based property developer Arada Developments LLC (Arada) an expected Long-Term Issuer Default Rating (IDR) of 'B+(EXP)'. The Outlook is Stable.
The final IDR is contingent on the planned benchmark-size unsecured sukuk being issued, the proceeds of which will be used to repay current debt and fund future developments.
The rating is based on Arada's Standalone Credit Profile (SCP) of 'b' and a one-notch uplift for support from the Sharjah government (as assessed under Fitch's Government-Related Entity (GRE) criteria). Arada was established in 2017 to develop fully-integrated communities in Sharjah, which will benefit the Emirate. The Sharjah government provides support to Arada, particularly for land to develop Aljada, the largest community project ever in Sharjah. This included an initial government debt guarantee to buy the land and subsequently converting the debt into a 16-year payable.
The SCP reflects high geographical concentration and execution risk. Arada has delivered one project and two major projects are underway, all in Sharjah, UAE. Arada has moderate net debt/EBITDA, averaging 4.1x over the forecast period.
KEY RATING DRIVERS
Focus on Sharjah: Master-plan community development in Sharjah has been minimal, especially compared with Dubai and Abu Dhabi. Arada's projects include residential assets with extensive public parks, as well as commercial, retail, hospitality, leisure and education assets in areas where these facilities are limited. These projects will benefit residents as well as the wider community and should help attract home buyers from across UAE and elsewhere, diversify the economy and bring more direct investment.
Limited History: Arada has launched three community projects to date, one of which, Nasma Residences, comprising 1,117 townhouses and villas, was delivered on time. In September 2017, Arada launched Aljada, Sharjah's largest ever mixed-use development, covering 2.2 million square metres (sq m) with 14 build phases (four are underway). There will be around 25,000 apartments, townhouses and villas for some 70,000 residents with significant green space, as well as retail, commercial, education and other assets. Arada has delivered about 1,500 units, one school and some retail and leisure assets to date. The company's third project, Masaar, is an upscale forested community of 4,000 units on 1.8 million sq m launched in January 2021. While sales across the projects have been strong to date, Arada needs to deliver units to generate cash flows. Material delays will weaken financial metrics.
Bottom-up Rating Approach: As an integral part of Sharjah's development plans for the real estate sector, Arada benefits from government support. We view the history of support as strong, as evidenced by a past debt guarantee for Arada financial obligations. The government has also provided extended payment plans for the Aljada land acquisition, spreading payments over 16 years, helping Arada substantially increase its landbank. Under GRE criteria, we view status control and ownership, as well as socio-political implications of default, as 'moderate', but the financial implications of default as 'weak'.
Arada also receives support for municipal or regulatory approvals, reducing execution risks and costs. However, government support is for projects, rather than for the overall company, and the government is not obliged to support Arada for projects outside Sharjah or in the future. We therefore rate the company on a bottom-up basis, adding a one-notch uplift to the SCP.
Material Project and Geographic Concentration: Arada is almost entirely exposed to the small, developing, Sharjah market. Although it has a strong market position, having delivered around two-thirds of residential units in the Emirate over the past two years, significant development risk remains in Aljada and Masaar. Arada will expand geographically, having acquired a 25,000 sq m beachfront plot on Dubai's Palm Jumeirah for a high-end mixed-used project launching in 3Q22. There will be no government support.
Arada is small, especially compared with other UAE master-plan developers and while its market position in Sharjah is insulated by government support, competing outside of Sharjah will be challenging.
Retail and Other Businesses Developing: Arada intends to diversify its revenue by retaining projects' investment properties, which will generate recurring revenue. This will include retail and leisure assets, as well as schools and hotels that will be leased to operators. Arada owns several other businesses that will further diversify cash flows. Nonetheless, these will remain a small part of the business.
Development Model Reduces Risk: Unlike some UAE master builders, Arada was not granted land, but has mainly acquired it through deferred payments to reduce upfront costs. Arada aims to achieve minimum pre-sales of 60-65% before committing to construction (this has exceeded 75% to date) with about 25% of sales value collected, mainly through customer deposits (usually 10% of the purchase price). Buyers typically further pay based on building milestones with 70% collected when the unit is delivered. If a buyer defaults, Arada retains the payments and can then sell the unit.
Project contracts are lump sum and at a fixed price, and contractors must provide a performance bond of 10% of the contract sum. Unlike in Dubai, Sharjah developers are not legally required to use escrow accounts to manage project cash flows, but Arada uses them owing to banks' requirements. This will likely change once the planned sukuk is issued.
Corporate Governance Weak: As a private company, Arada has a comparatively weak corporate governance structure. The board comprises four members with no independents: the two shareholders, the CEO and one member who has been with the board since the company's founding. The company intends to develop and improve corporate governance, but this will take some time.
Moderate Leverage Metrics: As Arada is in a significant build-up phase, revenue and EBITDA at end-2021 were only AED1.29 billion (EUR334 million) and AED210 million (EUR54 million), respectively, and gross debt/EBITDA of 4.4x. The proposed sukuk will refinance all current debt (AED920 million), which is fully secured. Revenue is forecast to increase to AED2.2 billion, resulting in net debt/EBITDA of 4.4x, but only slowly reducing owing to the material building schedule. The average for the next four years is of 4.1x. We have treated government payables for the land as part of working capital.
Arada has an ESG credit relevance score of '4' for Governance Structure to reflect the structure of the board of directors, which is weak compared with many EMEA peers. The board comprises four members, including the two shareholders and the CEO with no independents. All of the members sit on the four committees: audit, investment, remuneration and risk. The lack of an independent board has negative impact on the credit profile, and are relevant to the ratings in conjunction with other factors.
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For more information, contact:
Tahmina Pinnington-Mannan
Director, Corporate Communications
Fitch Group, 30 North Colonnade, London E14 5GN
tahmina.p-mannan@thefitchgroup.com
