Dubai: The UAE’s real estate sector is caught in a tight bear hug. And it’s not limited to what has been happening to property and construction stocks listed on the local bourses.
With a few exceptions, the first-half financials for the property majors have ranged from indifferent to abysmal. Union Properties saw a precipitous decline in revenues by 55 per cent in the first six months of the year from a year ago, while its net profit took a 93 per cent dive.
Deyaar, meanwhile, took a 72 per cent hit on its revenue numbers, but profit got a 24 per cent boost from one-off write-back of provisions.
Emaar, in contrast, pushed out another set of solid numbers — a revenue gain of 28 per cent, which brought on net profits that were up 19 per cent. Damac Properties was another to show off all-round gains, with net up 50 per cent plus to Dh2.65 billion on revenues of Dh4.79 billion.
These numbers reinforce — more than anything else — the need for developers to think beyond their core operations. In a soft market, and with no clarity on when it might end, it helps if the company can call upon steady income from non-core activities.
“A few developers manage to “smooth” out their earnings by diversifying their revenue streams into annuity based areas such as lease portfolios,” said Sameer Lakhani, Managing Director of Global Capital Partners. “This is exactly what Emaar has done.
“With a large land bank, the company has managed to stagger their launch schedule and have an execution record that has resulted in high levels of investor confidence. More importantly, the company derives 45 per cent of its revenues from hospitality and leasing, which is more “annuity” based cashflows rather than deal-based closures.” (Even then, Emaar’s revenues from property sales were up 40 per cent in the first-half, mirroring a “flight to quality” on the part of cautious investors, according to Lakhani.)
Deyaar this week will unveil the first phase of an ambitious project first announced at last year’s Cityscape in Dubai. While it recently launched the third phase of its flagship Green Community development, Union Properties has kept its options open on taking on additional ones, even further afield.
On the plus side, the debt levels at Emaar, Deyaar and Union Properties are deemed as “more or less stable”. For the latter two, current liabilities — those due in less than one year — are at 62 per cent and 55 per cent respectively.
But if property buyers continue to maintain a hands-off relationship with Dubai realty, things could turn quite dire and more so for contractors.
Even without this, Arabtec’s shares have had a hammering in recent months, as shareholders’ concerns mounted over changes at the senior management level and a lack of additional details on the company’s status on its Egypt projects.
Which would have repercussions for ‘contractor financing’. One reason could be that projects get delayed from clients in response to a slow real estate market. Or, as raising debt becomes difficult due to market conditions, developers will delay payments to the contractors, exerting pressure on the latter’s balance-sheets.
“Arabtec’s current debt as a percentage of total debt is 79 per cent,” said an analyst. “This clearly has sparked concerns contractors will have “funding issues” as they look to complete their projects; which in turn will delay project executions and thus their profitability.”
At DSI (Drake Scull International), profitability fell 52 per cent in the first-half, though revenues were higher by 2 per cent.
Arabtec’s numbers moved into negative territory, even though that was more due to internal restructuring. The company has been going through boardroom turnover “and this has clearly impacted broader investor sentiment as well”, the analyst added.
“These concerns have been amplified by the fact that revenue in the first-half fell 4 per cent, suggesting that even though the pipeline remains large, the company may have to elongate the duration of project execution.”
So, much rides on whether the market is able to shrug off its current inertia, and if so can the turnaround be done quickly enough.
Rohit Chawdhry, Head of Asset Management at Gulf Baader Capital Markets in Oman, paints a rather bearish outlook.
“There seems to be a lot of slack in terms of housing supply versus demand in the region’s real estate sector, and particularly in the UAE,” said Chawdhry, who is also sceptical about whether the Dubai property market can actually get the anticipated lift from the removal of sanctions on Iran.
“Dubai’s real estate sector has traditionally been a favourite with Iranian investors. Post sanctions, there is likely to be requirement to have project funding back home in Iran.
“Hence, this demand is expected to slow down. The recent H1 figures may be masking this “stealth weakness” in UAE real estate. Though H1 numbers were either in-line or above expectations, the forward outlook may not be that encouraging.
“From a macro perspective, if the historical relationship between GDP growth and property yields is expected to persist, then the weak Purchasing Manager’s index for UAE (proxy for UAE GDP growth) could likely signal more weakness in real estate.”
Clearly, for developers, property buyers and stock market investors, the short-term is not for the faint-hearted.