INTERNATIONAL REPORT—As Dubai’s Burj Khalifa and Rose Rayhaan by Rotana show, due diligence can’t account for all potential market pitfalls that might befall a large-scale development.
Even if that market pitfall happens to be the worst economic crisis in decades.
The Burj Khalifa, the world’s tallest building, and the Rose Rayhaan, the world’s tallest hotel, both opened this week on 4 January and 6 January, respectively. The sheer size of the structures is simply overwhelming. The Burj Khalifa, of which published reports say is valued at US$1.5 billion, is a half-mile tall and visible from 59 miles away. Rose Rayhaan, meantime, stands 1,094 feet tall on 72 floors.
M. Chase Burritt, managing partner of Burritt Associates LLC in Fort Pierce, Florida, has consulted on several large hotel projects, including some Disney developments in Orlando, Florida. He said the due diligence required for big projects is intense.
“The best was to describe a hotel asset is: tricky,” he said. “Typically, the due diligence is more stringent.”
He said the due diligence process generally begins with a feasibility study conducted by several parties, including the developer, operator, and investor groups. These groups will look at market research, treaties with neighboring countries, growth trends, the hotel business in that particular country, and perform a financial analysis.
And then, of course, design components have to be hammered out.
“It takes a while,” he said. “It can take several months and several hundred thousand dollars.”
Predicting the downturn
Despite the work that goes along with the due diligence, it’s nearly impossible for the planners to know what the economic realities of the future bring, as the process starts several years earlier, said Mark Wynne Smith, CEO of EMEA at Jones Lang LaSalle’s London office.
“It’s too far away to understand if it will match with demand or not,” he said of the Burj Khalifa. “Most of the residences (at Burj Khalifa) were sold before things went wrong. These things have a very long run-up to them.”
Mark Wynne Smith
Chase Burritt also said those taking part in the due diligence process can’t necessarily predict the future.
“It’s possible a banker could put some risk delta on it because it is a foreign market or is a state-directed project and is subject to political direction,” he said. “That stuff is a lot more subjective than you might think.”
Emaar Properties PJSC, the Dubai-based property developer of Burj Khalifa, and officials at Rose Rayhaan did not respond to requests for comment.
Wynne Smith said the due diligence process in Dubai is only slightly different than the rest of the world.
“Banking is more relationship, and less number-crunching,” he said.
There is also one other minor difference in Dubai when it comes to project-planning.
“The difference (in Dubai) is that you have 10 other guys on the next-door plot trying to do the same thing,” he said. “You have the risk of doing the same thing your neighbor is doing.”