While Emaar expands its presence overseas, Dubai still accounts for about 73 per cent of its total value and despite its recent slide in value the business house is likely to bounce back, according to a new report from HSBC bank.
Until 2006, plot sales accounted for more than half of Emaar’s revenues and the company recorded exceptionally high margins, 60 per cent, since the land was acquired free.
But in 2007, Emaar entered a new stage, with more revenue coming from unit sales and only eight per cent from plot sales. Gross margins shrank to 48 per cent. This trend is expected to continue for the Dubai business until rental income starts to contribute more significantly, after which margins should expand again – starting in 2009, the report’s authors said.
In 2015, rental income will account for 30 per cent of Dubai revenues. The widely anticipated oversupply in Dubai has yet to materialise, the report found.
Deliveries continue to be pushed back and scaled down. Based on the latest estimates by Colliers International, the forecast for the residential market in Dubai is expected to remain undersupplied at least until 2010.
Emaar expects to deliver roughly 15,000 units over the next three years. Of that, 10,000 or 66 per cent have been sold and 15 per cent of revenues recognised. Emaar uses the percentage of completion method, in which revenues start to be recognised only after 20 per cent of construction is complete. The report estimates Dh47 billion in revenue in Dubai has yet to be recognised.
Emaar’s limited exposure to the office property market makes the segment’s dynamics almost irrelevant to valuation. The company’s only office developments are Burj Dubai Square and Emaar Business Park. Compared to other sectors, the office market in Dubai is the tightest, with occupancy at more than 98 per cent.
Taking just Dubai into account, it is still the most at risk of oversupply. However, a large part of the population of Sharjah and Ajman work in Dubai. In the HSBC analysis it is assumed these figures stand at 50 per cent and 30 per cent respectively. As such, the demand suggests the market will reach equilibrium in 2009.
According to Colliers International, retail gross leasable area (GLA) in Dubai is expected to triple, from 1.4 million sqm in 2006 to 4.2 million sqm by 2010. Emaar expects to supply about 0.5 million sqm, or 12 per cent, by 2010 and 0.8 million sq m by 2011. Dubai Mall will account for most of that, with 0.35 million sqm of retail space.
Furthermore, given their prime locations and branding, Emaar’s malls will naturally cannibalise other, smaller malls.
The Dubai Department of Tourism recently revised its visitor targets from 15 million by 2010 to 10 million. That has a significant impact on hotel demand estimates. There’s expected to be a decline in hotel occupancy rates from an average rate of 82 per cent in 2006 to an average of 60 per cent by 2009, still within globally acceptable levels.
However, five out of six of Emaar’s hotels are located within the Burj Dubai development, which is both a prime tourist destination – Armani Hotel, Burj Dubai, Dubai Mall – and a business centre – located between Business Bay and DIFC – so the occupancy should be higher.
Additionally, the various product offerings of ultra-luxury (Armani Hotel), luxury (Burj Dubai Lake Hotel, Dubai Mall Hotel, and the Palace) and four-star hotels (Al Manzil and Qamardeen), should attract a wider demographic and protect the property giant from any slowdown in the tourism sector.
Meanwhile, Emaar is being further strengthened by joint ventures it has entered into, said HSBC. Under an agreement with Bawadi, the partner will contribute 6.5 million sqm of land – valued at Dh3.85bn – and Emaar will contribute Dh3.85bn in cash to fund construction work. Bawadi will progressively transfer land rights as Emaar invests the equivalent amount in construction.
While the joint venture is not as lucrative for Emaar as its other Dubai projects, as the land was not acquired free, it does add value. The most obvious benefit to the company is the replenishment of its quickly depleting land bank in Dubai, which it increases by 38 per cent, with no up-front cash payment. If the land value remains fixed at Dh3.8bn, then Emaar would benefit from land-price appreciation.
If it is marked to market in phases as rights are transferred, the company’s margins may come under pressure. Overall, Emaar expects an internal rate of return of 15 per cent, significantly lower than its other projects.
As the supply shortage has widened, the property market in Dubai has seen strong rental and price appreciation across all sectors in 2007.
While residential prices jumped 17 per cent, rental rates grew at a slower rate due to the government imposed seven per cent rental cap, which resulted in a decline in yields from 9.5 per cent in 2006 to 8.7 per cent last year.
Overall, the office market remains the most lucrative, recording the strongest growth at 26 per cent in prices and 21 per cent in rentals.
While the biggest risk in Dubai remains oversupply, HSBC said the real estate market would remain strong for the following reasons: with 50 per cent of forthcoming supply controlled Emaar, Nakheel, and Dubai Holding, supply can be managed to match demand; and the negative real interest rate environment (-8 per cent), is bound to boost investment in all assets classes, particularly real estate.
Dubai boom to lift Emaar shares