Pan-GCC, near term concerns relating to the real estate market are: i) Sluggish growth in the non-oil sector manifesting in low-to-negative jobs, with expat layoffs and higher vacancy rates thus pressure on property rentals; ii) rising interest rates – an obvious concern relating to the mortgage/real estate market; iii) risk of oversupply – particularly in Dubai; iv) geopolitics; v) risk of delinquencies in the off-plan sales market, again more pertinent to Dubai. We have yet to see any significant customer defaults since 2014, particularly in the listed (Emaar and Damac) real estate market space, but there could still be a risk for second- and third-tier developers who have been increasingly offering back-ended payment plans and vi) slowing down of transaction activity, resulting in lower liquidity in the secondary (constructed units) market segment.
2) What is your view for the real estate sector in the UAE?
Heading into 2019, we foresee a slowdown in the pace of decline across real estate capital and rental values in UAE, possibly hitting a bottom towards the end of the year. However, we see the recovery as U-shaped rather than V-shaped, given the multitude of challenges facing the sector.
After the global financial crisis, Dubai led the recovery in the UAE real estate market, with Abu Dhabi lagging by approximately a year. This time around, we are pre-disposed to think that Abu Dhabi might lead the recovery in the real estate market given: i) fiscal incentives by the Abu Dhabi government – the 18bn UAE dirhams ($4.9 billion) in housing loans is of particular mention; and ii) it does not have the overcapacity risk as that of Dubai, which, in the latter’s case could weigh on recovery in real estate prices despite an expected uptick in economic growth.
3) How have Q3 earnings been for UAE real estate companies?
Broadly, the earnings were a miss on estimates - led by margin compression across the real estate space. Key takeaways across the three main business segments of UAE real estate companies, i.e. ‘real estate development’, ‘hospitality’ and ‘retail’ were:
Real estate development: Double-digit year-on-year (YoY) declines across off-plan sales values of top-tier listed developers (ALDAR, EMAARDEV and DAMAC) underscoring the weak environment for the primary real estate market in UAE. That said, there was a meaningful pickup in sequential off-plan sales across the real estate space; particularly EMAARDEV, which managed a 64 percent quarter-on-quarter (QoQ) growth in off-plan sales to 3.8bn dirhams – which is encouraging given the tough macro situation.
Hospitality: Segment profitability for both Aldar and Emaar were weaker than expected; impacted by a downtrend in room rates.
Retail: Across in mall retail; Emaar Malls rental revenues grew by 15 percent YoY; however, growth was more of a function of capacity additions rather than a meaningful increase in rental rates. In Abu Dhabi, at Aldar’s flagship mall retail asset, ‘Yas Mall’, rental values were also under pressure from rental re-negotiations although occupancy levels have stabilized around the 90 percent levels. Namshi was a bright spot for Emaar Malls, with the fashion e-tailer revenues up by an encouraging 12 percent YoY in 3Q18.
4) What is your view for Emaar Properties?
It’s been a very tough year for Emaar shareholders, with the share price at five-year lows. It offers deep value for long term investors but in the near term I don’t see much traction in the stock, despite the steep correction.
Emaar, in recent years, has expanded aggressively in hospitality and mall retail which should generate value going forward. However, in the current risk-averse environment, investors are likely to prefer current income, i.e. dividends, over future growth. Despite the price correction, Emaar is still not as attractive as a yield play relative to other blue chip names (ALDAR and EMAARDEV), which are offering near double-digit dividend yields.
5) What is your view for the hospitality sector in the GCC?
Hospitality is in an interesting phase across the region, particularly Saudi Arabia. All the GCC countries are now looking to expand their entertainment/hospitality offerings to attract tourists. Within Saudi Arabia, we see a push to promote domestic tourism, whereas historically Saudi residents have been a major tourist source market for neighbouring GCC countries.
In terms of profitability, we still expect challenging times to continue on rising competitive intensity within the hospitality segment, given the sharp increase in supply of hospitality units across the region, particularly Dubai. Strength of the United States dollar is another concern which impacts the spending power of tourists coming from emerging markets such as India, China, Pakistan and Russia.
6) If you were to pick one regional real estate stock that you think will outperform over the next six months, which one would it be (and why)?
Thematically, we believe that those real estate stocks offering high dividend yields will outperform peers in the current market environment. Two names that stand out for us in this regard are Aldar Properties (ALDAR) and Emaar Development (EMAARDEV), which could rally in the run up to full year result announcements.
A recent sell-off has mechanically lifted Aldar’s dividend yield to above 9 percent, which we believe is sustainable given the increase in cash flow generation from recurring operations.
For EMAARDEV we have dividend visibility over the next 3 years where the management has guided to a cumulative dividend payout of at least $1.7bn between 2018-2020 (an annualized dividend yield of 12 percent), funded by its massive project backlog – which, at the end of 3Q18, was 39bn dirhams. The high dividend yield has been a buffer for the stock this year, with EMAARDEV outperforming the broader DFM index.
7) What is the outlook for the real estate market in Saudi Arabia?
The Saudi real estate market is at an interesting juncture – on one hand there is pressure on rentals and occupancy levels from the expat exodus in major cities but on the other there is genuine demand for housing from the country’s domestic population. In this regard, the government has been active in promoting mortgage and house ownership amongst Saudis. We should expect these efforts to gain traction heading into 2019 which should support some stabilisation in real estate price levels.
8) What is your view and the expectations for Expo 2020?
It’s going to be a big event for Dubai and a much-needed trigger for the economy in general, and the stock market in particular. The key challenge for Dubai going forward will be their ability to successfully leverage on the infrastructure and goodwill built on the Expo 2020 event - driving the next leg of growth for the emirate.
9) What is the outlook for the hotel industry in the UAE?
2018 has been the perfect storm for UAE hotel market, impacted by the VAT implementation, slowing growth in tourist arrivals (flat for Dubai for 10M18), rising supply and a weakness in EM currencies across key tourist source markets. Expect challenging times to continue in 2019, particularly for Dubai given the substantial increase in supply. The Abu Dhabi market might fare relatively better, given the lower base.
Regarding the Dubai hotel industry supply – as per JLL figures, a cumulative 40,000 hotel keys are estimated to have been added in Dubai over the 2014 – 2019 period, representing 60 percent of 2014 supply levels. Importantly, 21,000 of the 40,000 projected supply has already been delivered by the end of 3Q18, adding pressure on room rates.
10) Are easing regulations beneficial to the GCC markets?
Easing regulations are always constructive for business environment. The recent UAE decision to provide long term visas to expats is a step in the right direction, although the impact of such moves is more visible in the long term – don’t expect these measures to move the needle in the near term.
(Editing by Gerard Aoun and Michael Fahy)
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