The real-estate sector in the UAE is reeling from the dual economic impacts of coronavirus and the oil price decline, eroding credit quality for most.

The sector, which had already slowed down significantly over the past five years, will see further decreases in home sales and rental prices over the coming 12 to 18 months, Credit rating agency Moody’s said in its July in-depth sector real estate report.

Dubai will feel the impacts particularly, due to the emirate’s reliance on tourism and transportation, it said.

The combination of the pandemic and the slump in oil prices will contribute to the erosion of the non-oil economy by impacting foreign investment and economic confidence.

Gross profit margins of homebuilders such as Emaar Properties and Damaac will continue to weaken as job losses and salary cuts curb buyer demand for new properties, with travel restrictions also reducing international demand.

Moody’s predicts that Abu Dhabi will be less severely impacted, due to its greater overall wealth, its smaller reliance on foreign buyers than its neighbour, and the fact that it has less of an imbalance between property supply and demand.

The investor service said that retail and hospitality exposure will drive commercial real estate credit quality.

“The interest coverage and debt to EBITDA ratios of Emaar Malls (Baa2 negative) and Aldar Investment Properties (Baa1 stable) will weaken as revenue from retail tenants slumps, with only a partial recovery in 2021,” the report said.

The report predicts that real estate prices will decline less significantly in Abu Dhabi than they will in Dubai over the next 12-18 months: “This will support the credit quality of Aldar Investment Properties, Aldar Properties (Baa2 stable) and Emirates Strategic Investment Company (Baa3 stable),” it concluded.

The report shows that residential property prices have fallen by 30 percent and 28 percent respectively in Dubai and Abu Dhabi since October 2014, and projects that gross profit margins of major developers will continue to weaken.

Emaar Properties gross profit margin is predicted to continue falling from 53.4 per cent in 2015 to reach 35.3 percent in 2021.

Moody’s predicts continued efforts by real estate companies in both the residential and commercial sector to stimulate the market.

“We also expect the real estate companies to stimulate demand by extending payment terms, such as post-handover payment plans, or by paying a proportion of costs such as service charges and Dubai Land Department fees.”

In the commercial sector, retail landlords will have to continue measures such as extended payment terms and rent reductions to assist tenants already impacted by store closures during the lockdown period of the pandemic.

(Reporting by Imogen Lillywhite; editing by Seban Scaria)

( imogen.lillywhite@refinitiv.com)

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