Buoyant UAE real estate values are drawing money from the country’s domestic stock markets, although these high prices will eventually see investors return to equities.
“Real estate prices are still going up, as are rents,” said Walid Khalfallah, head of equity research at HSBC Middle East.
“The latter is not subject to speculative pressure, so rising rents show that demand still exceeds supply.
“Real estate fundamentals are still strong, although prices are increasing fast, which is a slight concern.”
With negative real interest rates now running at approximately seven per cent thanks to rampant UAE inflation and savage cuts in the United States, and therefore the UAE, interest rates since September, investors are shifting savings out of banks and into other investments to make up this shortfall.
The most accessible are property and equities and, Khalfallah said, retail stock market investors have turned to real estate as a surer way to make money.
“Small investors were badly burnt by the 2006 stock market crash, so many put their money into property instead,” said Khalfallah
“But with real estate prices soaring, the opportunities in this sector will be less obvious and so this money has to return to the stock market. Real estate stocks are much cheaper than real estate itself,” he said.
Khalfallah also claims UAE property stocks are excellent value, bearing in mind their growth prospects.
“Real estate equities are cheap considering where the real estate market is right now. Aldar’s stock has an upside potential of around 100 per cent,” he said.
“Aldar’s share price has stalled since the company approached its 40 per cent foreign ownership limit, while its convertible bond, which is effectively de facto equity, means it is over this limit.
“It’s a chicken and egg scenario – foreign institutions can’t buy, so local investors ask why should they when the share price is static? This is why Sorouh, which has yet to reach its foreign maximum, has outperformed Aldar this year.”
Aldar has also been hit by reports in the United Kingdom press claiming it is looking at investing in a British property firm.
“This has given foreign investors the jitters, because they question the wisdom of diversifying away from the amazing Abu Dhabi real estate boom. The strategic synergies of an emerging market developer are very different from an established market like the UK.”
UAE real estate stocks have endured a tough 2008, despite being one of the most traded sectors.
Sorouh is the only one to have advanced, climbing 13.6 per cent this year, while Emaar and Aldar have plunged 25.2 and 10.7 per cent respectively.
Rak Properties has fallen by 8.5 per cent and Union Properties by 5.3 per cent.
“Emaar is one of my favourite stocks for 2008,” said Khalfallah. “The company will reach the bottom in terms of margins in either the first or second quarter of this year or this might even have happened in the final quarter of 2007.
“After then, margins should pick substantially as Emaar’s overseas subsidiaries start showing up on its bottom line, while the company’s Burj Dubai development is also doing well.
“From an earnings perspective, Emaar should begin to do well and the market will have to recognise this.”
Real estate investors will return to stock markets