All new Dubai real estate projects will be completed: S&P

New real estate projects in Dubai will be completed even if prices weaken though a market correction has been ruled out in the short term. 

The reason: Developer margins are extremely high, over 50 per cent, and project pre-sales - 30 to 50 per cent — is enough to fund the completion of entire development, says Standard & Poor’s (S&P).

"Developer margins are very high 50 per cent plus, which kind of means that even if you had a significant ‘weakening’ in real estate prices it would still make an economic sense for them to pursue development and continue to develop their land banks," says Tommy Trask, Director, Corporate Ratings, S&P.

He believes that property companies are taking a more conservative approach than they have done in the past.

"They are typically launching new developments on a pre-sold basis so they would only launch once they have sold enough to fund the construction work and that is not difficult when you have margins of 50 per cent plus.”

Though the market is dominated by off plan sales, Trask says, adding, “We have seen many of the developers offering plot sales as an alternative to unit sales to boost their cash generation."

Post the global financial crisis; Dubai saw property prices declining by almost 50 per cent with a number of projects being put on hold. The 2013 prospectus put the number of stalled projects at over 230.

To revive and restart these stalled projects, the Dubai Land Department launched two initiatives – Tanmia and Tayseer – in 2010, which have revived over 30 projects to date.

The global ratings agency on Wednesday said residential property prices in Dubai were almost reaching 2008 peak levels, with the market not likely to see any major price correction in the short term,

(https://www.emirates247.com/business/economy-finance/dubai-property-prices-almost-near-2008-peak-levels-s-p-2014-05-21-1.549888)

Bank exposure moderate

Following the recovery in the real estate market, with about 60 per cent rise in prices over the past couple of years in Dubai, the exposure of UAE banks to the sector has been moderate, S&P said in a report.

“What is different so far in this price run-up is that there has been only modest growth in the exposure of banks, compared to the spike in real estate transaction volumes,” says Timucin Engin, Director of Financial Institution Ratings, S&P.

“This suggests that the local banking system’s contribution to financing real estate transactions is currently low,” he adds.

The conservative approach taken by banks is likely to see a change in 2015.

“We foresee an acceleration of real estate lending as developers launch new projects, and more local and expatriate customers seek to enter the mortgage market. Tighter rules on new mortgage loans are likely to buffer banks, but if they aggressively expand their exposure to the real estate sector, risks will continue to build,” Engin states.
 

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