Dubai mega-developer Emaar’s stock gained 86% in 12 months – can it do more?

By now, it is clear to everyone that Emaar Properties sits right at the top of the hierarchy of the UAE real estate market, with stellar earnings growth, an eye-popping sales backlog, and efficient execution of projects.

Plus, there are the price premiums for its communities and a secondary market that has bid up the price of its assets at an astonishing rate.

This has been reflected in Emaar’s stock price being up 86% over the last year and an astounding 325% in the last 5years (greater than the returns that investors would have made had they invested in the underlying properties itself).

Unlike Salik or Parkin, analysts have gotten their calls on Emaar bang on, with most strongly recommending the stock at current levels, with price targets ranging from Dh15.75 to as high as Dh17. The recommendations stem mostly from the macro strength of the Dubai real estate market Dubai, along with the blue-chip branding Emaar has built up, which is also reflected in its status as a bellwether stock.

Of course, lost in the commentary is the fact that the real estate industry is a notoriously cyclical one, and the markets in the UAE have gone through periods such as the fall in 2008, then in 2014, and again in the pandemic.

So, the million dollar question is whether the hyperactive growth is something that will continue or will we see a correction. Clearly on a valuation basis, there is nothing to suggest that Emaar trades at any level of froth (especially when one compares it to its peers in the developed world). But this was equally true in earlier market corrections as well, each time leading to upheaval even as the same analysts questioned the wisdom of their analysis conducted just days earlier.

Most of them admirably committed themselves to U-turns by suddenly turning bearish, after the fact, when the stock had already lost more than half of its value. Say what you will about the analyst community, they demonstrate an admirable skillset of following the crowd at chowtime.  

You would think that the battle-lines would be dawn along the borders of financial interest before the fact, but then that would be asking for too much, given the litany of financial history. The question becomes one of the macro market outlook in the face of stubbornly high inflation and cost pressures (potentially threatening margins), interest rates that are likely to remain high, looming tariff wars that threaten to exacerbate these pressures, and the fickleness of investors where the price of paper (offplan sales) is now double the price of ready homes.

Take all these along with a supply pipeline that is being dismissed by the same analysts who were wringing their hands in worry in 2020 when actually there were no homes available to speak of. For the long-term investor, there can be the alternate argument of buy-and-hold, regardless of market gyrations.

But this strategy has broadly not worked in emerging markets, where information dissemination is still something being worked through.  

Even as the depth of markets has increased with a flurry of new investors, there is clearly a consensus that there is no crash-proofing any market. And when valuations rise, they have to follow the laws of mean reversion or financial gravity.

Some of the problems are self-correcting, such as market making and value investing. But some are not. In this environment, where stocks globally are at all-time highs - along with those of real estate, gold and alternative assets - there seems to be no shortage of money. Therefore, little threat to the earnings stream.

Unfortunately, that is often the most dangerous phase of the market cycle. Time will tell whether we are in one right now, but it’s been awhile where patience as a quality of an investor has not been put through the test.

There should be little doubt that we are closer to the time where it will.