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29 March 2024

Robust realty, tourism boom will lift Emaar: Moody’s

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By Vicky Kapur

Dubai-based master developer Emaar Properties is set to benefit from the economic boom currently underway in Dubai, especially the surge in tourism and real estate sectors, according to global ratings agency Moody’s Investors Services.

In a new report titled ‘Emaar Properties: Domestic business to fuel growth, but full potential of international operations remains unrealised,’ the agency says “economic growth in the emirate of Dubai will continue to support Emaar’s domestic property development, hospitality and retail businesses.”

The agency maintains that a “robust Dubai real estate recovery has buoyed Emaar’s property development business.” Rehan Akbar, Moody’s Analyst and author of the report, says: “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.”

Emaar Properties has been at the core of Dubai’s property market ever since the emirate opened up the market in 2002-03, allowing expatriates and foreigners to buy houses in designated areas. The developer’s financials got affected during the UAE’s 2008-09 real estate slowdown, and the largely profitable company in fact booked losses of Dh1.7 billion during the fourth quarter 2009 because of a US write-down.

While the company put new projects in Dubai on hold for a handful of quarters owing to lacklustre demand, it has been unveiling and profitably selling projects at regular intervals since last year on the back the recent resurgence in the country’s property market.

“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,” Moody’s affirms.

“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,” the ratings agency notes.

Nevertheless, the ratings agency also cautions that “market exuberance runs the risk of overcapacity” as the list of local and international project announcements grows longer. “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,” said Akbar.

The report noted 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 UAE,” it said.

Footfall at Dubai Mall has witnessed compound annual growth rates of 25 per cent 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.

The risk to Emaar’s financials in the short-term may come from speculation, as has been also been highlighted by a number of other market watchers. The ratings agency too 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,” it notes.

According to a report published by property consultancy Asteco, the second quarter of this year saw a continuation of the slowdown in Q1 2014 residential sales performance for Dubai with the market witnessing marginal growth, up 6 and 3 per cent, respectively, for apartments and villas in Q2 2014.

Read: Revealed: Dubai’s top 5 cheapest and costliest areas to rent


The latest market report from Asteco anticipates renewed interest and activity in Q3 2014, as do other reports, including from global property consultancy Knight Frank.

Read: Dubai house prices to rise again in second half of 2014: Knight Frank

Moody’ said in its report that it views the introduction of post-crisis real estate regulations, such as mortgage caps and increased transfer fees, as positive incremental steps. The recent sluggishness in Dubai’s property prices can be attributed to steps that the authorities have been taking to tame the overheating segment, say experts.

“The slowdown can primarily be attributed to a combination of higher transfer fees and the introduction of mortgage caps – both of which came into effect in the final part of last year,” says Victoria Garrett, Associate Partner of Residential at Knight Frank, in the report published last month.

However, the agency added that it didn’t see these steps as sufficient to stamp out speculation altogether, particularly in the off-plan market where it says recently launched projects are being traded at between 5 and 30 per cent premiums, and developers are increasingly marketing projects with lax payment plans.

Further, Akbar said in the report that 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, it said, remain uncertain and is exacerbated by event risk and currency volatility.

Nevertheless, long-term economic potential and fundamental housing demand exists in these countries, which Emaar could benefit from in the medium-to-long term, the ratings agency concluded.