Sustained high inflation and high-interest rates may pose a risk to UAE homebuilders in the longer term, Moody’s Investor Service said in a new report.

The risks are greater for smaller developers, which are operating with less advantageous payment terms and potentially lower quality customers, the ratings agency added.

However, the UAE banks have improved their solvency and liquidity buffers since the 2008 global financial crisis when Dubai property values sank.

Problem loans have dropped from 10.5% to 5.1% since 2011, while loan loss coverage is now above 100%.

According to Moody’s, consumer spending is likely to decline, and the risk of missed mortgage repayments may rise if inflation does not slow and rates stay high.

Market liquidity and investor sentiment is expected to weaken if the global macro environment remains subdued and, particularly, if underlying geopolitical tensions in the region are exacerbated.

“Those risks would reduce demand for new supply in the market and could limit earnings growth and profitability for the homebuilders we rate,” Moody’s stated.

The major rated developers are Aldar Properties, Arada Development, Damac Real Estate Development Limited, Emaar Properties, and PNC Investments.

Moody's said that UAE real estate market conditions will remain healthy in the next 12-18 months, but demand will be slower than the past two years.

Prices have increased by about 15% on average in Dubai and Abu Dhabi since the second quarter of 2021, with 80,000 units currently under construction.

(Editing by Seban Scaria )