(This story was originally published Sunday.)

--Aldar and Sorouh say studying possible merger

--Potential tie-up comes amid a struggling Abu Dhabi real estate market

--Merged company would have combined market cap of $2.23 billion, according to Zawya.com

By Tahani Karrar-Lewsley

Of ZAWYA DOW JONES

DUBAI(Zawya Dow Jones)--Faced with a local real estate sector blighted by excess supply, Abu Dhabi-based developers Aldar Properties (ALDAR.AD) and Sorouh (SOROUH.AD) said they are studying a possible merger, a combination both say has the backing of the government.

Aldar and Sorouh, in a joint statement posted on the Abu Dhabi Securities Exchange website Sunday, said a team will be formed to study the legal and commercial aspects of a merger and will provide recommendations to senior management within the coming three months.

Based on Sunday's closing share prices, a combined Aldar and Sorouh would have a total market capitalization of about $2.23 billion, according to Zawya Dow Jones calculations. Dubai-based Emaar Properties (EMAAR.DFM) in comparison has a current market capitalization of around $5 billion.

Despite forecasts of about 5% economic growth this year, Abu Dhabi, which holds 7% of the world's oil reserves, has scaled back many of its ambitious real-estate projects to conserve cash as the global economy has slowed.

"The merger will be good for both companies as it will raise their landbanks and see less competition for future projects, it will also play into the government initiative to streamline and consolidate the market and help out developers in terms of cashflow and projects," said one Abu Dhabi-based analyst. "There's a finite amount of demand and if that is managed under one portfolio that will be better," he added.

According to property consultants C.B. Richard Ellis, at the end of 2011, Abu Dhabi's total office supply reached 2.74 million square meters and this figure is seen growing rapidly during 2012, while residential supply will likely outstrip demand over the next 12 months, resulting in further house price declines.

Another U.A.E-based real estate analyst, who declined to be named, said a key reason for a possible merger is cost cutting.

"It's about consolidation, reducing staff numbers, the market is difficult and there are more challenges ahead with more supply coming through so consolidation will reduce outflow and it will mean more streamlining and job cuts," he added.

Last month, Aldar said it swung to a full-year 2011 net profit of 642.5 million U.A.E. dirhams ($174.9 million) from a loss of AED12.66 billion the previous year, boosted by land sales and recurring revenue from investment properties, hotels and schools. Last year, government-related investment firm Mubadala Development raised its 20% share in the company to 49% after converting AED2.11 billion worth of Aldar bonds into shares.

In February, Sorouh said it planned to hand over more units in 2012 and boost its recurring income portfolio as it posted a fourth quarter net profit of AED93 million versus a net loss of AED212.5 million a year ago.

Aldar shares rose 8% to AED1.24, while Sorouh also climbed 8% to AED1.24 Sunday.

-By Tahani Karrar-Lewsley, Dow Jones Newswires; +9714 446-1692; Tahani.Karrar@dowjones.com

Copyright (c) 2012 Dow Jones & Co.