Although few observers of the real estate markets in the United Arab Emirates are forecasting a recovery in prices in a market where the supply pipeline continues to outstrip demand, the prospects for some of its developers may be looking a little brighter, according to analysts who spoke to Zawya following a rush of preliminary results announcements at the end of last week.

"The better-than-expected results from UAE real estate majors Aldar Properties, Damac, Emaar and Union Properties offer a beacon of hope for UAE equity as well as real estate investors," Arun Leslie John, lead researcher at Dubai-based brokerage Century Financial told Zawya in an email following the market's close on Thursday.

Dubai's blue-chip developer Emaar Properties reported a 30 percent increase in full-year net profit of around 7.22 billion UAE dirhams ($1.97 billion) for 2018 as revenue increased by 37 percent to 25.69 billion dirhams, the company said in a statement issued following the Dubai Financial Market's (DFM) close on Thursday.

Subsidiary Emaar Development had been a strong contributor to this growth, as it posted a 42 percent increase in net profit to 3.9 billion dirhams, as revenue grew by 75 percent to 15.43 billion dirhams. Emaar Development said in a statement on Thursday that the results highlighted "the strong investor interest for Emaar’s residential launches", as it sold over 6,500 residential units in 2018.

Ayub Ansari, senior analyst at Bahrain-based investment bank SICO, described Emaar Development's figures performance as “a fantastic result”.

"The positive thing was the off-plan sales, which were up 58 percent year-on-year in 4Q18,” he told Zawya in a telephone interview on Thursday. “The company managed to record strong growth in project sales despite the tough operating environment, which underscores the strength of the Emaar brand.”

Issam Kassabieh, senior financial analyst at Menacorp Financial Services, said that good results for Emaar’s three listed entities – parent firm Emaar Properties, Emaar Development and Emaar Malls – had been expected given the strong numbers posted during the first nine months of the year.

Despite this, he said that he felt the share price of both Emaar Properties and Emaar Development were suffering from the lack of trading volume on the Dubai Financial Market - figures published on Sunday morning by KAMCO Research found that average daily traded values for the Dubai market in the year to February 14 stood at just $41 million - lower than Abu Dhabi ($45.6 million), Qatar ($68.6 million), Kuwait ($91.3 million) and Saudi Arabia ($763 million).

"I honestly believe from a market point of view, the stock market with current volumes cannot handle two real estate giants - (Emaar) Properties and Development," he said.

He suggested that Emaar Development potentially offered a better return than its parent company, which faces a few headwinds.

"I know Amlak is a small subsidiary, but it's also making losses so that's affecting Emaar (Properties)," Kassabieh argued.

He also said that Emaar’s tendency to hold properties at book value and not to revalue them unless gains or losses are recognised via transactions may have been a drag on its share price if investors believe that properties on its balance sheet are too highly valued.

Overall, however, Kassabieh said that both Emaar Properties and its Abu Dhabi counterpart Aldar Properties are both better placed to cope with current market conditions than pure play developers like Damac Properties due to the recurring revenues they generate.

Real rewards

Aldar Properties reported a 7 percent decline in full-year profit attributable to shareholders in 2018 to 1.86 billion dirhams, despite sales increasing by 2 percent to 6.3 billion dirhams. However, a 17 percent increase in dividend recommended by its board to 14 fils per share, offering a total payout of 1.1 billion dirhams, certainly seems to have appealed to investors.

After announcing the payout plans following the market’s close on Wednesday, the company's shares jumped 11.5 percent in trading on Thursday.

Ansari said Aldar was also boosted by the fact that management gave guidance that off-plan sales are expected "to grow by more than 50 percent to 4 billion dirhams" in 2019 as it brings more budget properties to the market – a part of the market that remains underserved in Abu Dhabi.

"Of that, they've already done AED 800mn year-to-date," Ansari said.

Aldar Properties' shares declined by 28.9 percent in 2018 as investor concerns over the health of the UAE's real estate market deepened, while Emaar Properties dropped 37.5 percent, Damac Properties dropped 54.7 percent and Union Properties dropped 58.7 percent. An overall Thomson Reuters UAE Real Estate index reported a 33.7 percent decline in value last year.

Both Emaar Properties and Aldar Properties have enjoyed some respite so far in 2019 - the former's shares are trading around 6.5 percent higher and the latter's are up 8.2 percent, but the overall index has continued its slow decline (down 3.7 percent).

Damac Properties, which on Thursday revealed a 58 percent decline in full-year net profit for 2018 of 1.15 billion dirhams as revenue fell by almost 18 percent to 6.13 billion dirhams, has seen its shares slip by a further 19.2 percent so far this year, to 1.22 dirhams per share at close on Sunday.

Kassabieh said that Damac has suffered due to a lack of recurring revenue, meaning that in a market where off-plan sales are declining and developers are having to incentivise customers, its margins have come under increasing pressure.

Margin erosion

"I believe Damac's profit margins were at about 48-52 percent before. Now they're at 18 percent," he said, basing his calculation on the preliminary profit and revenue figures the developer declared to the DFM last week.

"This reiterates the importance of diversifying your real estate portfolio and the types of income you're getting," Kassabieh said.

The company's shares witnessed a brief spike last month after chairman Hussain Sajwani gave an interview to Bloomberg at Davos in which he talked about investing up to $1.3 billion in property in London, but fell again when the company clarified that Sajwani was talking about his plans as an international investor, as opposed to his role as Damac chairman.

Kassabieh believes overseas expansion should be a priority for UAE developers - most of whom are either heavily or exclusively concentrated in their home market.

"I know we have a lot of desert left, and there are a lot of areas left to be built, but the market is saturated - especially in terms of investment opportunities," he said.

Union Properties, meanwhile, said on Thursday that it had made a profit of 62.33 million dirhams in 2018 and said shareholders’ equity increased by 452 million, but it did not disclose revenues or give any more detail on how the increase in shareholders’ equity was achieved.

Kassabieh said that given the large write-offs the company declared in 2017 (after a new masterplan was created for Motor City with a smaller patch of developable land), this could have been achieved through a reversal of provisions and that more detailed statements were required before a judgment could be made on its performance. Its shares are 9.2 percent lower so far this year.

Taking stock

Last month, real estate consultancy JLL MENA's head of research, Craig Plumb, told Zawya that he expects that “around half” of the 62,000 units scheduled to complete this year will be built. If 31,000 units are delivered, this would represent the highest level of completions in Dubai in a single year, he added.

Another real estate consultancy, Core, said that it expects around 28,500 units to complete this year, stating that prices and rents "will remain under pressure" given the existing vacant or unsold stock in the market.

Kassabieh said that for luxury developers, particularly, there will be pressure to make sure units are sold either before or as they complete.

“Developers will need to opt for payment plans just to get rid of the units. If they hold for too long, especially the ones that are advertised as luxurious, these units will depreciate very fast."

Ansari predicts that 2019 "is going to be another tough year" for the Dubai real estate market in particular.

“The supply overhang will continue to play on sentiment. It's difficult to imagine prices recovering in 2019 - at best, they can bottom out and maintain that trajectory before we start seeing traction in a couple of years,” he argued.

Even so, he believes that the decline in valuation experienced by some developers has been overdone.

"Things are not as bad as stock prices reflect," Ansari said.

Century Financial's John agrees. He said that the pause in interest rate hikes by the US Federal Reserve and a more dovish approach by the European central bank will mean investors “are likely to increase inflows to high-yielding rental assets like those in (the) UAE, which have suffered a significant price correction”.

"Also, we expect the property market to benefit from the potential increase in economic activity investments as Expo 2020 gets closer, bringing in more tourists and residents to the city," John said.

Kassabieh maintains that fortunes may be more easily sought outside the Emirates.

“If we see some investments being done by these local companies in Saudi or in Europe - maybe in China - that would also be interesting,” he argued.

(Reporting by Michael Fahy; Editing by Gerard Aoun)


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