A bounce in the earnings and share prices of some United Arab Emirates real estate developers suggests the worst is over for the sector, but does not indicate a full-fledged recovery because property buyers remain very cautious, analysts say.
Property prices in Dubai fell 50 percent or more in the last several years, hit by the global financial crisis and the emirate’s own corporate debt problems. But a new report by consultants Jones Lang LaSalle said Dubai saw pockets of growth in residential housing prices in the first quarter of 2012 compared to a year ago, while office rents were bottoming out.
The sector is being boosted by population growth -- as Dubai’s economy grows, some of the workers who left during the depths of the 2009/10 corporate debt crisis appear to be returning -- and by a strong tourism industry.
Both factors have helped industry bellwether Emaar Properties, which in recent years has diversified its portfolio to include more retail and hospitality operations.
“Population growth has remained quite strong, 5 percent during 2011, and this is obviously a key driver of new demand within an expatriate-dominated city such as Dubai,” said Matthew Green, head of research at property consultants CB Richard Ellis in the UAE.
“There has been quite a considerable pick-up in tourism traffic into Dubai, Abu Dhabi and Oman, and probably to a lesser degree Qatar. I would say this is a direct impact of the Arab Spring.” Last year’s uprisings in the Arab World diverted traffic from unrest-hit countries such as Bahrain and several North African states to more stable countries.
Emaar reported a 44 percent rise in first-quarter profit on Saturday, beating analysts' forecasts. Its shares are market favorites. They stand 23 percent higher than their level at the end of last year, compared to an 18 percent gain for Dubai's main market index.
Haissam Arabi, chief executive and fund manager at Gulfmena Investments, said he expected Emaar’s current share price of about 3.08 dirhams to rise to 4.20 by year-end.
“A 12x multiple for Emaar in my opinion is now warranted - I take 12 times their expected earnings for 2012 and I get my fair value,” Arabi said.
The success of Emaar does not signal recovery for real estate firms in general, however. The company's mall and retail businesses contributed a third of total revenues in the last quarter; stronger property prices and deliveries of new units are not making as much of an impact on earnings growth.
The earnings of Deyaar Development, which posted a 64 percent drop in its first-quarter net profit, showed many developers remain under pressure.
“While we are seeing positive signs, the improvement in residential real estate in Dubai is still not trickling through,” said Arabi.
“It will still take a few more quarters or maybe 2013 before we see unit sales go up from developers' books. Following which, we might start seeing its impact on bottom-line growth.”
Meanwhile, the picture remains difficult for Abu Dhabi developers, with new supply expected to put downward pressure on prices.
“Abu Dhabi is now entering into a key phase of its development cycle, with around 23,000 residential units and significant new office supply being delivered this year alone,” said Green at CB Richard Ellis.
“This is likely to result in sustained rental declines for the year ahead, albeit at a less aggressive rate than was recorded during 2009 and 2010.”
While the share prices of the two biggest developers have rallied sharply this year, with Aldar Properties up 24 percent and Sorouh Real Estate up 33 percent, much of those gains have been driven by upbeat sentiment in the overall stock market, as well as by positive expectations for the planned, state-backed merger of the two companies.
Aldar is cleaning up its balance sheet with the help of government funds, and marked a profit in the first quarter after it sold land and residential units to the state.
But the company still has to cope with a huge supply of high-end homes entering the market. Property prices in Abu Dhabi are expected to fall another 11 percent from current levels, a Reuters poll of analysts showed in January.
Sorouh is also feeling the pinch in property prices, though its balance sheet appears stronger than Aldar’s. It posted a 30 percent rise in quarterly profit, in line with analysts’ estimates, and said it will deliver around 9,300 housing units by the end of 2013.