Negative outlook for GCC property

Moody’s Investor Service has kept its negative outlook for the real estate sector in the UAE and other Gulf oil producers but changed it into positive for Saudi Arabia following the massive public financial initiative announced by King Abdullah over the past few months.

Moody’s noted that business conditions in the six-nation Gulf Cooperation Council (GCC) are continuing to stabilise, underpinned by the modest global economic recovery that is currently underway.

It said that since the start of 2011, elevated oil prices – which recently increased even further as a result of political unrest in parts of the Middle East and North Africa (Mena) – have added momentum to the GCC’s overall economic growth.

It cited a recent report by the International Monetary Fund (IMF), which revised upwards its forecast for real GDP growth for the GCC to 7.8 per cent for 2011, compared with its previous projection of 5.2 per cent.

“Although we believe that the more rapid pace of economic growth expected in the GGC than in other regions bodes well for the eventual recovery of the Arabian Gulf property industry, it could take up to two or three years  before the still vast overcapacities are fully absorbed,” it said in a new report.

“Our outlook for the Arabian Gulf property industry remains negative, reflecting our view that key markets – Dubai, Abu Dhabi, Doha and Bahrain – will continue to suffer from severe oversupply in residential property and in commercial units.”

Moody’s said its outlook for Saudi Arabia is more positive, especially in the residential market where a large, growing and young population has built up demand. “While this pent-up demand has been visible for many years, a lack of funding combined with a shortage of affordable housing has constrained growth in the market. However, this could change with a new law on mortgage financing by the Saudi Arabian Shura Council.”

The report referred to King Abdullah’s initiative which involves spending of nearly $130 billion, including around $67 billion on the construction of 500,000 houses.

“We believe that these two developments bode well for the long-term growth prospects of the kingdom’s residential market.” It noted that governments throughout the GCC have either increased or announced their intention to increase spending for public infrastructure works, ranging from building and upgrading roads, airports and schools to the construction of hospitals, sewage facilities and power plants.

In Qatar, public infrastructure investments are progressing and activity is expected to ramp up ahead of the FIFA World Cup in 2022, which Qatar is hosting, including the possible development of rail links connecting Qatar with other major hubs in the GCC, Moody’s said.

“However, with the exception of a few rated entities that have specific expertise in delivering such projects, the positive effects of these plans on most issuers appear to be limited thus far.”

According to the report, access to funding will remain crucial for companies in the GCC seeking to preserve cash and for those facing large debt maturities as the 2012 maturity wall draws nearer.

It said that in January 2011, Aldar was recapitalized with the help of a significant capital infusion from government-owned Mubadala Development Company.

It said these measures, which also included asset sales to the government of Abu Dhabi, eliminated Aldar’s short-term refinancing needs.

“In light of the uncertain impact of these announcements, we changed the direction of our ongoing review of Aldar’s ratings from ‘under review for possible downgrade’ to ‘direction uncertain’ on 18 January 2011,” the report said.

“Our review will assess the longer-term implications of the announced asset impairments and sales to the government on Aldar’s medium-term business and cash-flow prospects. As for Jebel Ali Free Zone (Jafz), DIFC Investments LLC (“DIFCI” B3 negative) and Dubai Holding Commercial Operations Group (DHCOG), they still face significant maturities up until the end of 2012. We believe that Jafz’s need for external support is high as the company’s capital structure is unsustainable.”

According to Moody’s, the critical question here is whether Dubai’s desire or willingness to support these entities will be matched by an ability to provide support. “However, based on the current information available, we believe that Dubai’s desire to support entities remains strong for those defined as being core to the Emirate’s economic development.”

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