MIDEAST DEBT-Financing challenge overhangs huge Dubai projects

* Recovering economy permits revival of huge projects

* But financing environment not as positive as in last boom

* Many projects likely to be done in phases

* Some may not materialise at all

* Bonds, not bank loans may play bigger role this time

DUBAI, Nov 27 (Reuters) - Dubai is reviving massive real

estate projects as its economy recovers from a corporate debt

crisis, but this time around, constraints on financing are

likely to slow the pace of its building boom.

Memories of the crisis will keep many investors cautious

about stumping up money before projects are completed. That will

leave the plans heavily dependent on bank loans and the bond

markets - and the global climate is not favourable for banks.

Official announcements over the past few days have recalled

the heady days of the mid-2000s, when Dubai was building some of

ts most flamboyant projects, including the world's tallest

skyscraper and an archipelago of man-made islands.

Dubai's ruler Sheikh Mohammed bin Rashid al-Maktoum

unveiled plans last week for Emaar Properties and

conglomerate Dubai Holding to build a complex housing

100 hotels and the world's biggest shopping mall.

He did not say how much the project would cost but one local

property analyst, speaking on condition of anonymity in the

absence of fuller details, estimated it would cost between $20

billion and $50 billion. The upper end of that range would be

well over half of Dubai's annual economic output.

On Monday, Sheikh Mohammed announced that Dubai planned to

build a 10 billion dirham ($2.7 billion) complex of five theme

parks. Other projects dusted off by the government and property

developers in the last few months include a canal to the city's

business district and a $1 billion replica of the Taj Mahal.

It is by no means certain that all these plans will go

ahead. Dubai has a history of cancelled projects: plans for a

kilometre-high tower, an underwater hotel and a huge waterfront

development were mooted in the boom years and never happened.

But unlike projects which ran into trouble during the crisis

of 2009-2010, the viability of the new plans will be based to a

large degree not on Dubai's volatile real estate market, but on

revenues from tourism and retail spending.

So if the emirate's tourist boom continues, the projects may

pay off. Passenger traffic at Dubai International Airport is

growing at an annual rate of well over 10 percent.

Nevertheless, in the aftermath of Dubai's crisis, it would

be difficult to finance much of the projects by pre-selling

parts of them, said Craig Plumb, regional head of research at

consultancy Jones Lang LaSalle.

"There is natural caution among investors to buy off-plan.

There is investor appetite for some small off-plan projects but

certainly not at this scale," he said.

"So where the money is going to come from for this project

is a question that Emaar and Dubai Holding will have to address

soon."

FINANCES

In contrast to its oil-rich neighbour Abu Dhabi, Dubai's

government does not have the large fiscal reserves needed to

finance the projects; it was forced to take a last-minute $10

billion bailout from Abu Dhabi at the height of the crisis to

avoid a bond default of a state-linked developer.

The International Monetary Fund estimates Dubai's

government-linked entities will need to repay about $9.4 billion

of maturing bonds and syndicated loans in 2013 and $31.0 billion

- much of it loans that were extended during the crisis - in

2014. It calls refinancing these amounts "a challenge".

So Dubai will need to finance its projects from the markets,

and the loan markets do not look as attractive as they did in

the mid-2000s, when banks were scrambling to lend to the

emirate.

European banks have been cutting back their foreign lending

because of financial pressures in their home countries, while

many have been burned by Dubai debt restructurings since 2009.

"People have not fully forgotten what happened during the

crisis," said one senior Dubai-based banker.

Another international banker said he had not heard of any

serious financing plan for the shopping mall project so far.

"Given the magnitude of the project the government is

talking about, we would be in the loop if there was a serious

financing plan. This looks very initial and preliminary to me

right now," he said.

With foreign banks cautious, Dubai will need to turn to its

local banks. But they may not be big enough, especially since

rules introduced by the central bank this year in response to

the crisis limit commercial banks' exposure to state-linked

entities. Some banks already exceed the limit.

"Local banks are liquid but I can't see them pulling

something like this alone," said the first Dubai banker. "Even

to finance 50 percent of the project, as it's planned now, will

be a challenge for them."

BONDS

That leaves the bond market. Here the climate has improved

dramatically this year as investors have regained confidence in

Dubai; yields on bonds from the emirate have plunged.

In particular, sukuk (Islamic bonds) from Dubai have

attracted massive demand, partly because of a huge supply/demand

imbalance among cash-rich Islamic funds. So sukuk could play a

big role in Dubai's financing activities.

However, bond market traders and investors said the Dubai

government might not be able to raise more than roughly $3

billion through bond issues in a single year.

State-linked companies would probably find it more difficult

to issue bonds and have to pay investors higher yields,

especially since the Dubai government has been reluctant to

provide explicit guarantees for their bonds.

The result, analysts said, is that Dubai will probably

implement its big projects in phases spread over many years,

with the financing of each phase contingent on economic and

market conditions at the time.

Although Sheikh Mohammed said last week that construction of

the shopping mall complex should start "immediately", he did not

give a time frame.

State-backed companies from Abu Dhabi could be invited to

join in parts of the projects to improve access to financing.

"Abu Dhabi or some of its companies may be part of this mega

development," said an Abu Dhabi government official who did not

wish to be identified.

"It is early days, let's wait for the devil in the details."

(Additional reporting by Dinesh Nair, Mirna Sleiman, Rachna

Uppal and Stanley Carvalho; Editing by Andrew Torchia)

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