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In a city of huge projects, the Waterfront was to trump them all.

At a ceremony revealing the plans in 2005, executives from Nakheel, the Dubai World subsidiary that created Dubai’s Palm islands and The World archipelago, described the project that would balloon into a 130 square kilometre piece of land that would one day have enough homes and offices for 1.5 million people. It would be a new city that would unify two other massive projects: the reclaimed Palm Jebel Ali and a 75km waterway through the desert called the Arabian Canal. It would cost Dh100 billion (US$27.22bn).

Not only was the Waterfront Nakheel’s largest project, but it also formed the backbone of the company’s multibillion-dollar financing strategy. Waterfront land valued at Dh7.6bn was used to secure three Islamic bonds issued by Nakheel with a total value of $5.25bn. The sprawling project will play a major part in Dubai World’s restructuring proposal to creditors in the next few months as the conglomerate weighs which phases will be built and which should be scaled back or redesigned in the aftermath of the property decline.

“All details concerning Waterfront are currently being determined as part of the restructuring Nakheel is undergoing,” a Nakheel spokeswoman said.

Proposals for the Waterfront showed everything from an underwater hotel to a “city-within-a-city” on a square island designed by Rem Koolhaas, the renowned Dutch architect and theorist. One building would be shaped like a sphere; others were buildings shaped like asymmetrical stacks of paper.

“It was the creme-de-la-creme project,” said one former chief executive of a property developer with a project at the site. “The mock-up plan for the Waterfront was like a new Manhattan on the sea.”

Five years after the project was announced, construction has ground to a halt, and the patch of desert – a full 65 per cent of Nakheel’s land holdings – has become the object of dozens of disputes and even corruption allegations.

The global downturn sparked a domino effect bringing down economies and megaprojects around the world, and one of the last, and perhaps biggest dominoes in this region, to fall was Nakheel’s Waterfront.

“Now it’s all changed,” said the former chief executive, who did not want to be named. “Customers are suing the developer. The developer is suing the master developer. Cheques are bouncing. Contractors haven’t been paid.”

More than Dh10bn is tied up in land and off-plan apartment sales, according to investors and developers. Nakheel is expected to address these investments in its restructuring proposal. A recent visit to the Waterfront showed sand covering construction equipment and no people except for police officers in a patrol car and a pair of security guards at an entry point – in contrast to the 20,000 workers and 3,000 construction vehicles Nakheel said were on the site in February 2008.

The state of the Waterfront project is in some ways emblematic of the delays and disputes that have proliferated amid the decline of the property sector in Dubai during the global downturn, analysts say. It was the biggest project ever announced by one of Dubai’s biggest state-owned developers, an expression of the emirate’s ambitions. As Nakheel rethinks its largest projects and negotiates with banks over how it will repay money borrowed to finance such developments, much of the Waterfront is in a kind of limbo, Nakheel is struggling through its debt load, developers are in turn hesitant to build awaiting Nakheel’s fate, and investors are suing developers with dimming prospects for their investments.

Nakheel has made progress on two areas of the project, Veneto and Badrah, where the company was building villas. It has nearly finished a large canal that would form a central feature of the first phase, the Madinat al Arab. Individual plots of land facing the sea, where developers have said they would build high-rise luxury towers, are mostly undeveloped.

Investors who put their money with Omniyat Properties, a Dubai-based developer that bought land in the Waterfront and planned a project there, tell a common story. Attracted by Omniyat’s marketing machine – the company spent millions of dirhams advertising apartment buildings there – they poured money in during the run-up to the crisis, betting that Dubai’s soaring property market would keep rising. Now they are locked in a battle with the developer over how much construction it is contractually obliged to complete before demanding any more payments from them.

One of Omniyat’s projects, the Beachfront Living tower, sold more than 200 apartments and collected Dh314.7 million, according to an official review of the project’s escrow account by Caliber Middle East, a consultancy that advises Dubai’s Real Estate Regulatory Authority. Of that money and other funds Omniyat invested in the project, Caliber’s review shows, the company spent Dh237m on land payments and Dh101.6m on marketing expenses. Just Dh738,866 was spent on construction. The project has yet to move past the initial stages.

Omniyat declined to comment.

As if that weren’t enough infighting for one project, two former Waterfront executives, MJ and ML, were arrested in Dubai in January last year on suspicion of fraud relating to the project, and both were formally charged in July. A separate court case is under way in Australia in which Sunland Group, a developer based in the state of Queensland, has alleged that MJ helped engineer a deal under which Sunland paid a Dh44.1m consultancy fee in exchange for receiving below-market prices on land in the Waterfront. The cases are still pending, and MJ’s lawyers in Dubai and Australia did not comment.

In the meantime, Nakheel has been in negotiations with land owners at the Waterfront to shift them to other projects in the company’s portfolio such as The World islands and the remaining plots on the Palm Jumeirah.

The issue is simple: without sales or financing, Nakheel will have difficulty completing the Waterfront’s infrastructure in the near future. And yet Nakheel wants a solution that does not involve defaulting on its contractual responsibilities and being forced to pay back investors’ deposits.

But some of the development companies have disappeared altogether, leaving even more problems in their wake. One of the biggest Waterfront developers in the early days of the project was Define Properties, which was established in 2008 just as the property boom was subsiding.

The company bought 12 plots of land at the Waterfront and pledged to spend Dh8bn on residential and commercial projects throughout Dubai, according to statements at the time.

“Most of the money came from Russians,” said James Harrington, who worked for the company as a human resources consultant for several months. “They paid the initial payments on the land. The problems started when they couldn’t get enough money to keep up with the land payments.”

Alternative Capital Invest (ACI), another property developer, took over Define’s Niki Lauda Twin Towers after construction stalled and the future of the project became uncertain. ACI had marketed and sold the units in the building, but Define was responsible for building it. ACI declined to comment.

Henceforth, the Waterfront will probably focus on the same section that it started with, the Madinat al Arab, a stretch of beachfront surrounded by a man-made marina in much the same pattern as the nearby Dubai Marina. The first phase of the beachfront was sold out in five days for more than Dh13bn in 2005. However, construction stopped before any buildings took shape.

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Define Properties executive detained

by Bradley Hope and Hani M Bathish

Last Updated: April 08. 2009 10:09PM UAE / April 8. 2009 6:09PM GMT DUBAI //

A principal shareholder of Define Properties has been detained by Dubai authorities on provisional charges of fraud, prosecutors said today.

malika-smilegrootThe arrest of the executive comes in the middle of negotiations with Alternative Capital Invest Real Estate (ACI), a Germany-based property developer operating in Dubai, to take over some of Define’s assets. The major shareholder was arrested in mid-March after complaints were filed by an investor in Define Properties, said Tarek Daoud, the administration director of the company. He said the amount being sought by the investor was close to Dh30 million (US$8.1m).

“He is arrested and in Bur Dubai police station,” Mr Daoud said. A lawyer for the detained executive did not return messages today. Robin Lohmann, the managing director of ACI, said the arrest would not disrupt his company’s negotiations with Define Properties. “It is not affecting our deal,” Mr Lohmann said. “We are negotiating over a different part of the company that is unrelated to this case.”

Earlier this year, ACI took over the Niki Lauda Twin Towers in Business Bay from Define Properties after construction stalled and the future of the project appeared to be in jeopardy. ACI had marketed and sold units in the building last year, but Define Properties was still responsible for building it. Mr Lohmann said today he was also interested in taking over the Define Essence tower located in the Waterfront, a huge development near Palm Jebel Ali, and another plot of land in the same area.

The claim made against the executive was under negotiation by lawyers from the two sides and it was likely to be “resolved shortly”, he said. Since the property market slowed last year, developers have delayed or cancelled several projects and many buyers have defaulted on payments. The result has been a rise in disputes over property. Many of these have been civil cases filed in the Property Court, but some have been filed through the police as criminal charges.

The Dubai authorities have also been investigating widespread suspected fraud in property finance during which dozens of senior executives have been detained. There was no indication that the Define Properties case was related to this wider investigation.

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Define Properties was established in June last year, just as the five-year property boom was beginning to subside. The company bought 12 plots of land at the Waterfront from Nakheel and pledged to spend Dh8 billion on residential and commercial projects throughout Dubai, according to company statements at the time. But as the market began to slow, the company faced difficulty with financing its operations and continuing construction.

Mr Lohmann said that some areas of Dubai, such as the Waterfront, would have to cut back or delay projects indefinitely because of the global financial crisis. A Nakheel official has previously said that parts of the Waterfront development were being delayed, but the project as a whole was going forward. bhope@thenational.ae hbathish@thenational.ae