STRENGTH BUILDING

Dubai 2016 | REAL ESTATE & CONSTRUCTION | VIP INTERVIEW

TBY talks to PNC Menon, Group Chairman of Sobha, on backward integration and the firm's most significant projects.

How would you describe Sobha Group's approach to being a backward-integrated organization and how does this fit in with the overall capability of the company?

Over the past 20 years, we have built our strength as a fully backward-integrated organization. In essence, we maintain total control of all of our activities. We have developed in-house expertise to meet all crucial aspects of construction. We are perhaps the only construction company globally that has all of its activities fully backward integrated. We manage the design, engineering, manufacturing, and contracting processes, along with all other critical processes in the real estate development value chain. This gives us tremendous and complete control over the quality of our end product, which is the most significant benefit. This approach has enabled us to deliver the highest-quality products in the industry, spanning four decades. From my perspective, as an organization, Sobha's core strengths lie in its execution capabilities to deliver superior quality, our track record in consistently exceeding customer expectations, the credibility that comes with our success to date, and the highly professional approach with which our company is run.

What is your expansion strategy?

While Sobha entered the Dubai market in 2005, our most recent efforts have been centered on Sobha Hartland and Mohammed Bin Rashid Al Maktoum City – District One, which were launched in 2013. By March 2015, despite a continued softening in Dubai's real estate sector, I felt that the organization had sufficient visibility and confidence to successfully deliver both projects in a timely manner while ensuring that its quality standards would surpass customer expectations. This self-assurance enabled my team and I to evaluate new international markets, which could provide Sobha with a platform for geographic diversification, additional streams of revenue growth, and an ability to elevate and strengthen Sobha as a global brand. Having evaluated several key geographies, London won our confidence. While this was driven by a few factors, of primary importance was the fact that London's residential real estate sector had continued to generate long-term growth and stability, despite market volatility in other major cities worldwide. It was also apparent that the London market would appreciate and welcome the quality standards that Sobha had built its reputation on over the past four decades. We have secured our office location in London's Mayfair area, which represents our first step into the UK market. Sobha's strategy to enter London is predicated on its focus on the luxury residential segment and on primarily executing redevelopment projects through a JV approach. Fortunately, we have identified a well-respected, London-based group with whom we will finalize our JV arrangement. This group has been able to provide us with access to some of London's most preeminent and sought after project locations, where we would be able to leverage our strengths in luxury residential development. Our partnership will be represented under the brand of Sobha Europe, which will serve as the entity through which all UK-based projects will be executed and delivered. To date, with our JV partner, we have identified six redevelopment projects that we plan to enter in 2016. In addition to our UK expansion, we are also in advanced discussions to finalize additional expansion efforts within the UAE. Given the scale of these opportunities, I expect that the UAE, UK, and India markets will provide us with a strong runway for growth over the next 10-15 years. We expect to commence construction in January 2016 and begin delivery of our apartments and villas by mid 2017.

How much investor interest is there in this project so far?

Based on my experience, Dubai's real estate market tends to experience a two-year positive cycle, followed by a two-year negative cycle. Unfortunately, as we witnessed in 2009, 2010, 2011, and the first half of 2012, Dubai went through a three-and-a-half year negative cycle. I view this as an unusual situation. In hindsight, given the severity of the downturn, the market needed more time to rebound. Dubai's positive cycle began by the second half of 2012 and lasted through mid-2014, during which we experienced two years of sustained growth. By 2H2014, we were once again in a negative cycle. During negative cycles, our sales are typically 20% of what we achieve during a positive cycle. I expect that by 2H2016 we will once again enter a positive cycle. Fortunately, we launched District One during the positive cycle. From a total of four phases, we have launched two phases so far, both of which are nearly sold out. A few villas are still available. We expect to launch phase three in the next 1-2 months.

The District One project is a JV with Meydan Group. How did this alliance emerge?

Yes, this is a 50-50 JV with Meydan Group. Given my experience of working on prestigious and high-profile projects for the rulers of Oman, the UAE, Bahrain, Qatar, and Brunei, there is an extensive track record and familiarity that I have with this region. This experience, coupled with our quality-focused approach, represented a strong synergy with Meydan Group and its requirements. I am extremely pleased and fortunate to have entered into this alliance. The opportunity to work alongside an extremely seasoned and professional group has been invaluable. Both sides have been able to leverage their respective strengths, which is ultimately what all great partnerships should be based on.

What is your outlook for the rest of 2015 and what advice would you offer?

I expect the remainder of 2015 and first half of 2016 to continue under the current negative cycle. From my perspective, real estate developers should acknowledge the cyclical nature of the industry and avoid the temptation to panic. For those who do not panic, there will be opportunities. I have seen developers over-react too often, especially when they have not implemented a sound financial engineering approach to managing the ups and downs of the market. Proper financial engineering will help developers prepare for the cycles and plan accordingly.