Low returns keep institutional investors at bay

Overcapacity and mid to high single-digit returns are preventing institutional investors from moving into the Dubai's realty market, while the outlook for the Gulf Co-operation Council (GCC) property sector remains "negative", Moody's Investors Service said.

"We believe that the difference between current actual returns in the mid to high single-digit percentages versus expectations of returns in excess of 10 per cent as well as continued overcapacity, is preventing institutional investors from moving into the market," said Martin Kohlhase, Assistant Vice-President - Analyst, Moody's Middle East in Dubai, in a new report.

"This implies that prices would have to fall further or that the economic recovery would have to be more pronounced than is currently anticipated to restore the demand-supply balance and provide returns attractive to institutional investors," he said.

Emirates Business had reported earlier that a number of international funds are looking to invest in the Dubai property market, as they believe prices have bottom out. However, no concrete deals have been so far reported. While Moody's believe markets have largely "bottomed out", it said there are pockets of asset classes, predominantly office space and to a lesser degree residential properties, and regions, such as Dubai in particular, that will remain under continued pressure due to continued oversupply. The global rating agency further says funding, demand and the preservation of cash will remain the three key drivers of the property industry in the Gulf for the next 12 to 18 months.

"The supply-demand imbalance in commercial property and, to some degree, in residential units, depending on the city or country, is likely to grow worse as vast supply meets slack demand. This is the main driver of our continued negative outlook for the industry," Kohlhase said.

However, significant differences remain across the region, with Saudi Arabia seen as one of the brighter spots of the GCC countries.

As a result of the sharp deterioration in the market, which was triggered by a lack of funding for customers as well as developers, GCC issuers, with real estate exposure, are facing tighter liquidity and have to address future refinancing requirements, with 2012 appearing as the peak year when maturities need to be addressed.

"The predominant pre-sale model has largely disappeared and with it an important source of financing for many developers.

"As long as the banking system is reeling with non-performing loans and high exposure to the real estate and construction industries on its loan books, markets for new projects are very unlikely to commence on a large scale," the report said.

Increasingly, issuers will have to address their upcoming maturities and more vigorously term out their short-term debt, which exposes a number of them to roll-over risk in an environment where banks face a rise in non-performing loans and high exposure to the real estate sector.

"We would expect that issuers will address these maturities well in advance, ie over the next 18 months.

"Although we acknowledge that owing to regional market conditions many issuers have favoured uncommitted, bilateral credit facilities with relationship banks over many years, we expect issuers to increasingly make use of capital market debt vehicles (such as sukuks, bonds or securitisation) in order to term out their debt profile and to diversify their creditor base," it said.

Off-plan sales to remain stagnant in Abu Dhabi

Off-plan sales in Abu Dhabi's residential sector is expected to remain stagnant unless financing becomes available and significant progress is made on a given project, Moody's said.

Despite the Abu Dhabi market's strong fundamentals (existing supply/demand gap), sale prices and rents declined in 2009 due to the lack of financing and investors' preference for completed units.

Future supply is driven by three large master developers (two of which are fully or partly government-owned) and supply could be adjusted or their resources reallocated from private to public developments such as infrastructure or social housing.

On the commercial property side, the government remains committed to large infrastructure and residential projects. The tendency of prime grade offices to be occupied by government entities and the limited supply entering the market over the past two years have been insufficient to maintain rents and sales' levels.

Demand projected to stay strong in saudi arabia

Demand, especially for the middle-income segment in Saudi Arabia, is expected to stay strong irrespective of the final approval of the mortgage law, which if passed, could represent a significant boost for residential sales, said the report.

The large, growing and young population of the kingdom continues to support the local residential market which is structurally undersupplied in the low to middle income segments.

The bulk of the offer is located in large cities (Riyadh, Mecca, Jeddah and the Eastern Provinces), where rent and sale prices have remained stable in prime areas, while limited price correction has been witnessed on the outskirts.

Lack of availability of prime retail, commercial and hospitality offering is likely to support prices and rent. Tier-two offering will be under the pressure given the new supply coming on stream. Government initiatives will continue to support the sector through public spending on infrastructure and the economic cities.

Gain

There has been inner-emirates migration to Dubai in order to cut down on commuting time, which continues to put pressure on residential properties in the Northern Emirates, Moody's said.

Northern Emirates lack the access that Dubai and Abu Dhabi offer in terms of international connectivity mainly through their airports, but also through the port and free zone infrastructure in Dubai.

As office rents fall in Dubai and at some stage in Abu Dhabi as new supply hits the capital market, this could exert downward pressure on demand and yields for commercial properties, the Moody's report said.