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Gulf Property Remains 'Outlier', Telcos Negative: Moody's

The property sector will remain an "outlier" and under-perform in the Gulf, says Moody's Investors Service, in an analysis of some of the key sectors in the region.

"Our outlook for the property industry remains negative due to persistent oversupply in key markets in the GCC," said Moody's in a note. "The excess supply of commercial and, to a lesser extent, residential property reflects excessively high growth projections made before the global financial crisis."

While that does not come as a surprise, Moody's is not positive on the telecom sector either, suggesting competitive pressures in core markets are hurting profits of major companies.

Both the sectors will also be hurt by the regional turmoil. "We maintain our view that markets in the GCC will continue to stabilise, although issuers with a more pronounced geographical exposure to troubled MENA countries - such as telecoms and selected real estate players (e.g. Emaar) - could be impacted by political instability there."

The recovery could take as much as two to three years, "if not longer for Dubai commercial office space, before the still vast overcapacities are fully absorbed."

Residential and commercial real estate in Dubai, Abu Dhabi and Bahrain are worst hit, although Saudi Arabia paints a slightly different picture due to latent 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."

Moody's analysis is mostly in line with a Jones Lang La Salle report which recently surveyed MENA based institutional real estate investors.

The real estate consultancy asked respondents asked about capital value expectations for Abu Dhabi, Dubai, and KSA: "For all three markets, investors broadly expect real estate values to decline over the next 12 months... Respondents anticipate highest capital value declines in Abu Dhabi, with investors expecting some stability in Dubai values," wrote JLL.

However, JLL's survey respondents remained optimistic about KSA's market fundamentals, specifically the high liquidity resulting from a strong petrochemical-driven economy combined with the fiscal commitment to infrastructure development.



Moody's, which rates some of the major companies in the region such Saudi Electricity Company, Qatar Real Estate, Dubai Holdings Commercial Group, Saudi Telecom, Etisalat, among others, does not expect the recent spending programmes announced by various Gulf governments to immediately impact on these major companies.

"With the exception of a few rated entities that have specific expertise in delivering such projects (for example, Aldar has won some contracts), the positive effects of these programmes on most issuers appear to be limited thus far."

Moody's major concerns are Jebel Ali Free Zone (Jafz), DIFC Investments and Dubai Holding Commercial Operations Group ( DHCOG ), which 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," says 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."

Making The Call

Moody's is not enamoured by the region's telecom sector which it sees struggling to find growth in mature and competitive markets. Debt-based acquisitions will also weaken the credit profiles especially of aggressive regional companies such as Qtel and Etisalat.

Beyond acquisition, there is limited upside for the telecom players as they have saturated value-added telephony services to their core markets which have limited population bases.

In fact, Etisalat, Saudi Telecom and Qatar Telecom have all lost market share, a trend that is set to continue, especially as the market opens further. For example, the UAE - which is the most closed telecom market in the region - is expected to allow number portability at some point in the future, further eroding Etisalat's profitability.

"Given that GCC markets have relatively small populations and the mobile telephony market is largely saturated, we expect operators to seek alternative revenue sources, such as broadband and data services for corporations and governments."

Leave The Light On

The Gulf's utilities sector should benefit from increased consumption and rising infrastructure demand in virtually all the Gulf states.
Moody's estimates that energy demand in the Middle East is forecast to grow at one of the highest rates in the world's main regions. The regional share of worldwide demand is expected to reach 6.6% in 2030, up from 5.7% in 2010.



Major players such as Saudi Electricity are embarking on $80 billion plans to double raise capacity in the face of rising populations and economies.

"Governments and regulators have taken actions that are generally supportive of the utilities sector, such as limiting competition, allowing for tariff increases and making fossil fuels available on preferential terms, from which all rated entities in the GCC benefit as government-ownership levels remain high," says Moody's. "Electricity also remains an important distribution tool for governments to provide subsidies to the local population. Given these factors, we believe the credit outlook for the sector is stable."

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