As we approach the recovery phase of the COVID-19 pandemic, the scale and impact of its devastation has laid waste to many sectors of the economy and tipped over the edge those sectors that were on the brink of collapse. The real estate market is particularly vulnerable given its fragile state in both the UAE and Saudi Arabia in 2020. In the aftermath of COVID-19 we expect a number of real estate asset classes, borrowers and project developers to face bankruptcy on a scale that could perhaps eclipse the Global Financial Crisis of 2008.

JLL and Baker McKenzie are pleased to present a webinar series to banks in the UAE and Saudi Arabia at this critical time, setting out our thoughts on the restructuring issues and solutions to be considered by banks to protect their position in the face of distressed real estate assets and borrowers in a rapidly changing and volatile world.

In our webinar, JLL and Baker McKenzie will discuss the issues banks need to consider when restructuring or disposing of distressed real estate portfolios.

Position of Banks

The banks will most likely be in the following position:

  • They will have exhausted their means of communication with the owners/borrowers.
  • The loan-to-value (LTV) ratio would be breached.
  • An event of default would have occurred and a foreclosure scenario would be considered.
  • They may look to forego the interest and/or waive any principal amounts under the financings prior to foreclosure and enforcement.
  • They will have a pledge over shares of the borrower and/or, for any distressed real estate project that is not yet in operation, 'step-in' rights under the construction contracts.
  • If restructuring is not considered to be a viable option, they may look to enforce security (including any real estate mortgages).
  • They would not want to take liability or (except in very limited circumstances where additional value may be achieved by doing so) take control over the distressed real estate projects.
  • There may be flexibility to re-negotiate and restructure the real estate loans.

Hospitality/Retail Components

If the distressed real estate project consists of any hospitality and/or retail components, the following should be considered:

  • Whether or not such asset is income yielding.
  • Whether any advance payments have been made for the leasing of retail spaces.
  • The fees owed by owners to any operators of such distressed real estate assets and the status of payment of such fees.
  • The methods for disposing the asset and/or property and using the sale funds for repayment of any debts owed by the owners to the banks.
  • In the event there are no prospective purchasers for the distressed real estate assets, other options available to banks would include a write down of the debts owed or an asset-to-debt swap.
  • A due diligence process would typically be undertaken on the distressed real estate assets.

Construction Contracts

The following will need to be considered in respect of the construction contracts for any distressed real estate project under development:

  • The time and cost to complete the project.
  • Amounts owed by the owner of the project to the contractor (including the contractor's liabilities to subcontractors and suppliers).
  • Whether the contractor is in a position to terminate the construction contract and whether the bank should consider exercising its 'step-in' rights to prevent termination.
  • Whether there are grounds to terminate the contractor and claim against any contractor securities.
  • Whether there are any disputes (including litigation or arbitration) between the owner and contractor.
  • Ownership of equipment and materials on the site.

Off-Plan Sales

The following should be considered in relation to distressed real estate assets for which construction has not yet completed and where units in the property have been sold off-plan:

  • Amounts paid and owed by purchasers of off-plan units.
  • Amounts required to be paid for completion of the project.
  • Amounts to be reimbursed to purchasers of the off-plan units.
  • The disputes and challenges brought by purchasers against the owners of the distressed real estate project.
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