Dubai’s boom-and-bust real estate market can land you at the wheel of a Rolls-Royce or behind bars. Kabir Mulchandani should know: he’s experienced both.
Five years after spending 140 days in jail facing charges of fraud and embezzlement for which he ultimately was cleared, the chairman of developer SKAI Holdings stands at a building site watching cranes start work on one of the company’s three projects. They will have a combined value of about 6 billion dirhams ($1.6 billion) when completed.
“I guess the beauty of life is its uncertainty,” said Mulchandani, 42. “I went from making corporate deals, hanging out on a yacht and living in Emirates Hills to sharing a jail cell with eight others.”
As a property-flipping speculator before Dubai’s 2008 real estate crash, Mulchandani rode the ups and downs of a market that’s offering second chances to investors and developers who didn’t fail or flee. He profited from the chaos — buying land when values collapsed — and now welcomes changes in regulations, and investor attitudes, that are bringing a measure of order to the Dubai market. As he rebuilds his reputation, he faces impatient investors who seek rapid growth.
“People in Dubai are used to prices going up very fast or down very fast,” Mulchandani said. “The market’s stabilization is limiting the pool of buyers and requires a lot of work to get investors to accept slower returns and more regulations. It will take time until people get used to that.”
Born in India and educated in New Hampshire and California, Mulchandani said he fell in love with Dubai in 2003 during a free two-day stay offered by Emirates Airlines after selling his consumer electronics business in Mumbai. From his hotel-room window, he saw construction springing up all over the area and decided then to invest in Dubai, even though he’d never been in the real estate business.
Mulchandani started by buying a four-story building and selling it within months for a 20 percent profit. Before long, he was purchasing and reselling hundreds of properties from 13 developers, including many that hadn’t been built yet.
“There was nothing in what we did that almost everyone in Dubai wasn’t already doing,” he said. “It’s just that we did it on a much bigger scale.”
And so it went for the next four years as Dubai became one of the world’s fastest-growing real estate markets. Mulchandani’s firm, Dynasty Zarooni, often paid as little as 10 percent of a property’s value before reselling it. The buyer would become responsible for subsequent payments due during construction and upon completion by providing postdated checks, he said.
In August 2008, a group of investors asked to skip an installment; in return they offered to pay Dynasty Zarooni a higher final price for the property.
“They were essentially saying: ‘I’m never going to hold onto this and I’m sure I’ll find someone else to buy it before I have to make that completion payment,’” the CEO said.
That’s when Mulchandani knew the party was coming to an end. Within weeks he sold all the uncompleted properties in his portfolio as signs of economic turmoil were growing in the U.S.
“A friend took me out of the office and said ‘let’s sell everything. We pushed it and pushed it but it’s time to exit,’” Mulchandani said. “People were willing to pay obscene amounts of money for leverage and when you see that, you know something is fundamentally wrong.”
A month later, in September 2008, the bottom fell out of Dubai’s property market. The collapse of Lehman Brothers Holdings Inc. worsened the global financial crisis and prompted banks in Dubai to curtail lending.
Home prices in the desert sheikhdom declined as much as 65 percent, with no distinction between completed properties and ones that were nothing more than artists’ sketches. Buyers were stuck paying installments for homes purchased at peak prices because most were made with a series of postdated checks.
“I knew that bouncing a check was a criminal offense,” Mulchandani said. “What I didn’t know is that the only way to stop a check was to say it was obtained through fraud or on false pretenses. At the time, everybody lost a lot of money and people wanted to see somebody fall.”
Dynasty Zarooni held more than 100 million dirhams in postdated checks from buyers and by early 2009, checks from some purchasers bounced and complaints were filed, Mulchandani said. The buyers accused Mulchandani of selling nonexistent properties as well as illegally running an investment club with guaranteed returns, according to court documents.
Mulchandani surrendered to authorities, thinking he would be released in a couple of days after police looked into the allegations. Instead, he sat in jail for 140 days while Dubai’s Land Department investigated the claims.
“I never knew that losing one’s freedom can be physically painful,” he said of his first day behind bars. “There was a unique pain that resembles a muscle ache that shot through my whole body.”
Mulchandani was released after the Dubai Land Department cleared him of fraud and embezzlement charges. It determined that he had the right to resell the yet-to-be-built properties and that he had complied with all laws and regulations.
“All claims mentioned have been replied to with documents, while the statements of the complainants are mere statements and baseless allegations,” the Land Department said in a June 2009 report on the case. “No criminal punishment shall be imposed based on those baseless allegations.”
It would still take Mulchandani two years to clear himself of the investment club allegations. By the time he was finished, real estate prices were bottoming in 2011 and he started a new company, SKAI Holding. It took over three half-built properties from a Turkish developer that ran out of cash. He finished one and delivered it to buyers, while the other two are set for completion in November, he said.
In 2011, Mulchandani was convinced Dubai would soon be on the mend. The city had the best infrastructure in the Middle East, from roads and bridges to the airport and metro train. While much of the region was engulfed in political turmoil, Dubai was attracting millions of tourists with its luxury hotels, sprawling malls and a measure of security.
“Dubai saw excessive exuberance before the crisis, but it also saw excessive pessimism after that,” he said. Prices at the waterfront Jumeirah Beach Residence, for example, fell to less than the cost of construction, he said.
When a broker told him a plot of land on the Palm Jumeirah artificial island was on the market, Mulchandani jumped at the chance. Two days later, he was at Nakheel PJSC’s sales office buying the 30,000 square-meter (320,000 square-foot) waterfront plot for 400 million dirhams.
He paid 100 million dirhams upfront and the rest through postdated checks. At the end of June, the land and the building under construction were valued at $558 million by Deloitte, according to a report provided by the developer. The Viceroy will have gross development value of $963 million when completed, according to Deloitte.
With a prime piece of development land in his portfolio, Mulchandani said he persuaded China State Construction Engineering Corp. to invest $1 billion in the ASSAS joint venture with SKAI Holding. That gave the Chinese company a minority stake in the venture, which is majority owned by Mulchandani. Yu Tao, CEO of China State Construction’s Middle East unit, is chairman of ASSAS, according to SKAI’s website.
China State Construction, the country’s biggest builder by market value, is constructing the Viceroy project on the trunk of the Palm Jumeirah and will be erecting twin towers in Jumeirah Village. Around 30 percent of buyers in SKAI’s projects are Chinese after the developer held roadshows in Shanghai, Mulchandani said. Industrial & Commercial Bank of China Ltd. in January loaned SKAI $201 million.
China State Construction declined to comment on the partnership when contacted through the company’s Middle East office in Dubai.
SKAI Holdings, majority-owned by Mulchandani, said it has sold about 1,200 hotel rooms and apartments in advance on two of its three projects. That includes a hotel tower in Jumeirah Village, where it sold more than 500 units in one month. China State Construction will act as both investor and builder.
SKAI is relying on selling properties before they are built, a practice called “off plan” that played a role in Dubai’s property crash as well as the CEO’s legal woes in the past. He says the market is less risky today after authorities introduced rules to rein in speculation and cool prices.
Regulations put in place over the last couple of years include a requirement that developers fully pay for land and secure at least 20 percent of the construction costs before starting sales. That helps weed out developers who aren’t serious about completing their projects, Mulchandani said.
The United Arab Emirates central bank last year moved to stem rising prices by restricting the size of mortgages, and some developers are imposing their own limits on the resale of off-plan homes before they reach a certain level of completion.
“There is no doubt the market has been stable this year with stricter regulations,” said Mulchandani. “Developers and buyers are also maturing and realizing that doubling your investment in six months can also mean losing it in the same amount of time.”
Some of the biggest Dubai property companies are also riding the market’s rebound after shaking off damage from the crash to take advantage of growing demand for hotel and retail properties.
Union Properties PJSC, which reported three years of net losses and had to surrender some assets to creditors, posted net income of 1.58 billion dirhams last year and plans to build about 1,000 hotel rooms in the next five years. Nakheel PJSC, builder of the Palm Jumeirah island and the recipient of government bailouts worth $8.6 billion, this month said it repaid all of its 7.9 billion dirhams in bank debt. The state-controlled company is building homes on the palm and plans to construct 2,900 hotel rooms across Dubai.
Hotel occupancy in Dubai is among the strongest in the world, averaging around 80 percent in the past four years, according to Philip Wooller, Middle East and Africa director at STR Global. Occupancy has hovered around 78 percent this year and it’s expected to reach 80 percent by the end of December. Average room rates in the city are among the world’s highest, he said.
Dubai was the world’s fastest growing property market last year with home prices surging 35 percent, according to Khawar Khan, a research manager at broker Knight Frank LLP in Dubai. Price growth has decelerated this year with values increasing 24 percent in the second quarter compared with the year earlier period after the United Arab Emirates’ central banks last year issued regulations limiting mortgages and Dubai’s government doubled transaction fees to 4 percent, Khan said.
Mulchandani said personal changes and lessons learned from the past also contributed to his success the second time around.
Being locked up was “the best experience of my life,” he said. “The amount of introspection you get to do in custody isn’t possible anywhere else and I realized that life is about intent, not about results. I decided that I need to have a moral core that I check against every aspect of my life.”
He also made changes in his personal life, divorcing his first wife and a few years later marrying Emirati developer Nadia Zaal.
Healing his reputation is still difficult. Mulchandani said it can be frustrating to have to rehash the legal case every time he tries to strike a deal or sign for a loan.
“A developer’s reputation, while important, is no longer the primary concern of an investor who is looking for gains,” Taher Safieddine, an analyst at Shuaa Capital PSC, said by phone. The Real Estate Regulatory Agency, known as RERA, “has learned from the crisis and now closely follows all operational aspects of projects,” he said.
Questions about the case are becoming fewer and fewer, Mulchandani said, before leaving the building site in a black Rolls-Royce.-Bloomberg
