EEMAR housing projects in United Arab Emirates.
Goals and context
The United Arab Emirates has been faced by weaknesses in the housing sector. It is still not yet established if the problem arises out of shortage in land that makes it expensive, or the residents consider other projects more relevant. Increases in the prices of crude oil over the last five years have played a critical role in boosting growth in the country. This has resulted to increase in investors, in different sectors. The challenge resulting from this growth is increased population and demand in real estate and construction sector (Times, 2012).
EEMAR is one of the established real estate and construction sector that targets at constructing more estates to shelter the increasing demand. EEMAR international was established in 2004 and is aimed at reducing the risk of a single housing market in UAE that has led to high rental rates. The project aims at identifying untapped resources and bringing them together to strengthen real estate in UAE. In October 2012, EEMAR properties launched the EEMAR square project in uptown Cairo.
The project involves international investment in Egypt, which is considered vital in growth of UAE. EEMAR properties views Egypt as a key emerging market, and this could offer diversified revenue streams for the UAE. The risks associated with this investment are liquidity risks, the risk of currency, and the global changes in market value.
Egypt is a developing country, and like in all markets, the housing sector can experience dramatic changes in market value. The EEMAR square project is expected to have a high turnover if not faced by market upswings and downswings (Betty, 2011). However, this risk is inevitable due to changes in demand and supply and also due to currency variations. The project is a long lasting projects thereby no room for quitting on price falls and getting back when the prices increase.
The universal exchange rate has been facing challenges as a result of global recession and inflation. This implies that the rates of investment returns are at risk. If the foreign currency weakens as compared to the US dollar, the project may reduce the overall turnover and this may weaken the economy of UAE. The project may also face a risk stemming from lack of markets bearing in mind that it’s a long term investment (Culp, 2001). This implies that if the market turns out to be not as fine as it is thought to be, UAE may lose a lot of capital.
The key risk in this project is the market efficiency that will be determined by the consumer behavior. There is uncertainty in the cash flow process of the project since their expectations on differences in prices and returns. This may last for some duration of time, probably for the first five years, but the investors’ project returns after this duration. The level of risk occurrence on this project is projected to be high. Treating these risks just like any other risk in business, however, would minimize the impact that they would have on the expectations (Times, 2012).
These three risks are significant to the project and to the overall economy of UAE. The probabilities of the occurrence of these risks especially on market changes are exceptionally high since recession is worldwide and the project developers can do least about it. The changes in markets are a factor in currency exchange rates. The market rates determine the exchange rates, and this means that any change in the foreign currency affects the returns of the project. The level of occurrence of this risk is estimated to be high, but since it’s a global concern, it means that the competitors will also be faced by the same issues hence the loss may be minimized.
There are no foreseen sale transactions over the project hence the liquidity risk may not affect the project returns.
The assessment of the highlighted risks of this project meets the objective of the project in the international market setting. The risks do not impact on the project from its main goal rather they increase its effectiveness and objective. These risks should be treated just like any other business risk (Betty, 2011). The business should have strategies on market competition that would increase the turnover. The problems arising with liquidity risks can only be associated to projects that are short term. To minimize the risk, EEMAR should have a long term vision of investing internationally. This implies that there would be no transactions putting the project’s returns at stake rather the aim would be to realize the returns and boost growth.
The project has cost the constructing company and the government over AED220 billion. This capital is enough for the project to be competitive and threaten away any new entrants. The capital can be considered enough to cope with the market and currency changes (Culp, 2001). The company should, however, improve on diversity on investment so that if one area is hit by these risks, the other projects cover for the loss. An example may include investing in local infrastructure so that when the international market and currency exchange becomes weak, the local turnover bridges the balance to avoid loss.
Betty, J. (2011). Total Risk Evaluation for Capital Budgeting. Journal of Applied Finance, Vol. 21(1).
Culp, C. (2001). The Risk Management Process: Business Strategy and Tactics. John Wiley & Sons: New Jersey.
Times, K. (02 0ct, 2012). EEMAR Square in DH7.7 b Uptown Cairo Launched. Gulf In the Media.