Blue City, Oman: when a tower is not enough

Blue City is owned by Al Sawadi Investment and Tourism Company (ASIT), which is described in official literature as having “the endorsement of the Government of Oman.” The developers are keen to present it as a government-supported project rather than a government project, and in fact, ASIT’s ownership is complicated and disputed: it is owned by a group called Ocean Developments, which is 30% owned by an Omani company called Cyclone, whose shareholders are understood to include a member of Oman’s royal family. But Cyclone is in dispute with a Bahrain-based company, AAJ Holdings about who owns the rest; the dispute is now in court. A ruling in March said AAJ held the remaining 70%, but this decision is believed to be under appeal. AAJ itself has said publicly it feels as if it has been pushed out of the project by the minority shareholder; Cyclone, a private company, is less vocal and, indeed, little is known about it.

Separately, there is a design and construction company called AECO Development, a joint venture between Turkey’s ENKA Construction and Industry and Greece’s Elliniki Technodomiki TEB, while other involved groups include the ubiquitous Foster + Partners as master planner and architectural consultant, and WS Atkins as environmental consultants.

Even with state backing (such as it is), a project of this scale has required external funding, and here things have occasionally got a bit more complicated. A $925 million bond was raised in November 2006 through Bear Stearns to help financing of the first phase.  Clearly, Bear Stearns did not survive to see so much as a villa get built, but that bank’s collapse has not really been an issue for Blue City since the funding had all been raised well before what was left of Bear Stearns was absorbed by JP Morgan. What was an issue, though, was when Fitch put $526 million of the debt on ratings watch negative in July after it fell behind revenue targets. Fitch said at the time: “If sales performance does not improve significantly over the coming months and quarters, the borrower may eventually struggle to continue funding the construction costs of the project.”

This, in turn, was a function of a redesign of the masterplan, which delayed everything else – including construction and, consequently, sales. Russell explains: “There was a business decision taken with the consent of the trustees to redo the masterplan,” he says, saying the old one was “quite inefficient”. In his telling, the issue with the debt is that its documentation became inconsistent with actual sales because of the time taken to revamp the masterplan, and that that’s the only problem. “That delayed the process to start sales by about nine months. So unfortunately the sales test data in the actual documentation was never changed to follow suit. That’s what we’re working with Fitch on now, trying to align every page. The actual sales critera have not changed but there was a disconnect.”

Russell’s own appointment in June, with former CEO Professor Fari Akhlaghi stepping to the sidelines as “advisor to the board of directors”, was designed to put the project back on track after the delays; the issues with Fitch and the debt would have been pretty much the first things in his in-tray. According to interviews around that time, he inherited a target of $101 million of home sales revenue by August 7, with an actual figure of just $31 million sold. But, asked whether the revenue and debt issues are resolvable, he says: “Yes, definitely”. He is also sure everything can be delivered on time in 2012.

Alongside all of these local complications there is the impact of the credit crunch to contend with. “We have actually seen an increase in our sales,” Russell says. “Oman has a measured approach to growth and development so there wasn’t this huge explosion you’ve seen in the rest of the region. On our side, the construction finance is already in place with the bond issue. And the decline in material costs is to our favour: cement and steel are down 50%.”

He says buyers have been “a completely mixed bag”, including Omanis, Europeans and regional people. And he argues that over-pricing elsewhere in the region is helping his development. “Pricing is so much lower than in our neighbours,” he says. “We saw it even before the bubble, people moving across the border, people preferring to live in Muscat and work in the UAE on weekdays.”