Emaar Properties face market oversupply risks, Moody’s


According to Moody’s Investors Service, economic growth will bolster Emaar Properties PJSC’s domestic businesses, although the rating agency cautions that market exuberance runs the risk of overcapacity, in a new report published today. Economic growth in the emirate of Dubai will continue to support Emaar’s domestic property development, hospitality and retail businesses.[wpsr_retweet]

The report titled “Emaar Properties: Domestic Business to Fuel Growth, but Full Potential of International Operations Remains Unrealised” is now available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.

“Emaar’s pre-sales model and construction-linked payment plan mitigates development risk, while its hospitality and retail assets provide a cushion against market volatility”, said Rehan Akbar, Moody’s Analyst and author of the report. “However, there is a risk that the company embarks on a significant multi-year capital spending plan in the current market up-cycle to not only launch new developments but also expand its hospitality and retail assets at a time when competitors are increasingly becoming active in these sectors, which could create overcapacity”, added Akbar.

Moody’s notes that tourism growth and political stability underpin Emaar’s recurring revenue expansion. The consistent growth in Emaar’s recurring revenue base is driven by tourism growth and the political stability of the United Arab Emirates. Footfall at Dubai Mall has witnessed compound annual growth rates of 25% since 2009, while Dubai’s hospitality sector in 2013 recorded the highest profitability within the Middle East and North Africa for the fourth consecutive year. Moody’s recently assigned investment grade rating to Emaar Malls Group reflects the rating agency’s view that Emaar’s retail subsidiary will remain fairly strong in a scenario of sluggish domestic economic growth.

In addition to tourism, the robust Dubai real estate recovery has buoyed Emaar’s property development business. The strong recovery in Dubai’s real estate market has allowed Emaar to sell down the unit inventory that it accumulated during the 2008-10 crisis and has given it the opportunity to successfully launch new high-margin residential projects. Large-scale mega-projects have been launched as joint-ventures with other government-related real estate developers, which helps to diversify risk and reduce upfront costs at the expense of profit sharing.

However, Moody’s notes that regulation is unlikely to reign in domestic real estate speculation, which is a cause for concern. Depending on the market data source, real estate prices in Dubai are either close to, or have already reached, pre-crisis levels that were achieved in 2008. As such, the rating agency is cautious about the sustainability of current trends as it believes property prices are already at the upper bound of affordability for many end-users, although there are some early signs that the market has begun to see a slowdown in property price growth. Moody’s views the introduction of post-crisis real estate regulations, such as mortgage caps and increased transfer fees, as positive incremental steps. However, these steps are not sufficient to stamp out speculation, particularly in the off-plan market where recently launched projects are being traded at 5%-30% premiums and developers are increasingly marketing projects with lax payment plans.

Furthermore, the performance of Emaar’s international operations is constrained by socio-political and economic challenges in core countries such as Egypt, Turkey, India and Pakistan. The timing and quality of investment returns remain uncertain and is exacerbated by event risk and currency volatility. However, long-term economic potential and fundamental housing demand exists in these countries, which Emaar could benefit from in the medium-to-long term.


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