Dubai: Key sectors such as real estate, tourism, hospitality and retail, will likely remain under pressure for the next 12-24 months as Dubai’s economy slowly recovers from the impact of COVID-19, according to S&P Global Ratings.
Tourism could recover earlier than the others due to the vaccination effort in UAE, with the immunization rate at 55-60 per cent of the population, S&P said in a new report. “However, we expect real estate companies' profitability to remain under pressure and leverage to be high,” said Sapna Jagtiani, S&P Global Ratings' credit analyst.
“Absent a substantial recovery in revenue, companies are likely to focus on cost optimization, proactively managing their liquidity, and preserving their cashflows,” said Jagtiani. “Rated Dubai-based real estate companies still have good liquidity and access to funding, however, despite currently trying times.”
Expo 2020 - expected to take place from October 1, 2021 to March 31, 2022 - should provide a platform for a recovery in activity, said the report. “However, we think last year's shock will continue to reverberate through the economy, and GDP (in dollar terms) will return to the 2019 level only in 2023, keeping the pressure on most sectors until then,” it added.
S&P said in its report that 2020 results of rated real estate companies will likely be weak, with only marginal improvements in 2021. Normalization of relations with Israel, as well as restoration of ties between Qatar and the four Arab countries previously boycotting the country, should support tourism and real estate investments, it added.
S&P expects Dubai’s residential property market to eventually have “robust” transaction volumes because of cheaper housing units. Villa prices will be more resilient as buyers look for larger homes.
S&P said rent relief measures will continue leading to revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) declines for mall developers/owners. Also, turnover rents will become a more common feature in lease contracts.
‘Grade A’ or high quality spaces will benefit relative to the rest of the market due to the ongoing polarization of rent and occupancy. This will be accompanied by a continued rationalization of office space as more companies opt for work-from-home for the long term.
Co-working spaces will continue to disrupt the market for traditional office space.
For Dubai’s hotel industry, domestic demand will increase, but not sufficiently to compensate for loss of international tourism, said S&P, adding that beachfront and tourism hotels should fare better than business-focussed ones.
Expo 2020's rescheduling to 2021 will temporarily ease pressures on average daily rates and occupancy, S&P said.