Coronavirus to drive steeper decline in property prices, more rent freezes in Dubai: S&P

Analysts warn property firms of negative outlook due to global pandemic

View of Dubai Sheikh Zayed Road amidst coronavirus sterilization champaign all over UAE. Image courtesy Dubai Media Office Twitter handle.

View of Dubai Sheikh Zayed Road amidst coronavirus sterilization champaign all over UAE. Image courtesy Dubai Media Office Twitter handle.

As the coronavirus crisis continues to ravage economies worldwide, home prices in Dubai will decline more steeply and landlords will be forced to freeze rents, according to the latest analysis.

S&P has also lowered its ratings on some major Dubai-based real estate firms, citing that the current health pandemic is likely to reduce international and local demand for property in the emirate.

Dubai’s real estate has been struggling to cope with excess residential supply, which has caused prices and rents to decline. In 2019, more than 35,000 homes were still completed, the highest number delivered in a single year in the emirate. There were expectations that the high supply could be absorbed by the increase in demand during the Expo 2020 later this year.

However, with business activity and non-essential services now grinding to a halt due to the outbreak, it is not clear yet if the global event will push through as scheduled or boost demand.

The coronavirus that started in Wuhan, China only about three months ago is now moving at ferocious rates, infecting more than 660,000 people worldwide as of Sunday morning and forcing governments to ground passenger aircraft, shut down borders and limit the movement of citizens.

Economic impact

With the weakening economic conditions, analysts said it is clear that Dubai will experience some downside, given that it is dependent on travel and tourism activity, which provides thousands of jobs in the economy.

“The current supply-demand imbalance in Dubai’s real estate market has been exacerbated by the effects of the COVID-19 pandemic. We also expect negative employment trends across some key sectors such as tourism and retail, as well as for certain small and midsize enterprises, which could weigh on demand for new properties,” S&P said.

It added that the emirate may, at some point, see “widespread” temporary company closures, similar to that in other regions, or work stoppages, including at construction sites, which could lead to delays in future residential property deliveries. This, in turn, could put pressure on developers’ finances.

“We now expect the fall in residential prices will be steeper than we previously expected, with adverse trends lingering well into 2021,” said S&P.

“We anticipate private retail real estate companies such as Majid Al Futtaim and Emaar Malls may also have to grant a rent freeze to allow tenants to manage their businesses, as is the case in other regions. Similar measures might also be extended by office real estate landlords… to support businesses that aren’t operating at their usual capacities,” S&P added.

The UAE government had earlier rolled out economic stimulus packages, now amounting to 126 billion UAE dirhams ($34 billion) to cushion the impact of the pandemic on the local economy, while some big businesses have extended support packages and initiatives to help struggling entrepreneurs, particularly small and medium enterprises (SMEs). The latest to announce relief efforts  is the Dubai Free Zones Council, which announced this weekend it would postpone the rent payments for six months and facilitate instalments for property tenants.

Impact on real estate firms

Given the weakening market trends, S&P said it has lowered its ratings on Damac Real Estate Development from B+ to B, with a negative outlook and placed Emaar Properties and Emaar Malls on “creditwatch with negative implications.” It has also revised its outlook on Dubai International Financial Centre (DIFC) Investments to negative outlook from stable and affirmed its BBB ratings.

“Although the severity of the impact on Dubai’s real estate sector depends on the duration of the COVID-19 outbreak and the extent of government measures, it’s clear there will be some downside,” S&P said.

“This is mainly because of the emirate’s reliance on travel and tourism activity, which provides thousands of jobs in the economy. What is also uncertain at the moment is whether the World Expo 2020… can shore up market sentiment or lead to meaningful recovery,” it added.


As for DAMAC, analysts said, there won’t be any new project launches this year and the company will likely focus on selling its existing inventory. The company currently has more than 15,000 units under construction, of which 4,000 to 5,000 units are expected to be delivered this year, if not delayed by the current pandemic.

“DAMAC’s adjusted debt to EBITDA ratio at about 5.8 times at year-end 2019, and we think that currently weakening market conditions will prevent any significant deleveraging in 2020-2021,” said S&P.

“DAMAC’s estimated over $2 billion order book provides visibility on about two-thirds of its revenue for 2020. However, we still think the company’s new sales may come under severe pricing pressure and hinder its EBITDA (earnings before interest, taxes, depreciation and amortisation) margin recovery from an estimated low 11 percent in 2019.”


S&P said it has placed its ratings on Emaar Properties and its core subsidiary Emaar Malls on “creditwatch negative” because it foresees the health crisis and the general macro-economic situation in Dubai will lead to “notable” weakening of Emaar Properties’ credit metrics in 2020-2021.

“We now anticipate funds from operation (FFO) to debt will decline to 30 percent to 35 percent in the absence of mitigating actions by the company’s management, as opposed to our expectation of FFO to debt remaining above 45 percent for the BBB rating level,” S&P said.

“We anticipate additional pressure on the group’s revenue and margins across all of its businesses in the next few months. We think that real estate development operations in Dubai will continue to experience heightened pricing pressure that could reduce margins, and we see a risk of handover delays and more difficult collections due to oversupply and weakening economic conditions,” it added.

Analysts also expect the company’s hospitality business to be impacted, citing that three hotels were already temporarily shut down in an effort to reduce costs. “The temporary closure of entertainment venues and recently announced shutdown of malls due to the threat of COVID-19 will undermine the group’s more stable and profitable operations from these businesses, in our view.”

However, analysts pointed out that they still think that Emaar’s solid market position, strong brand value, high asset quality, experienced management team and focus on cost management will allow the company to navigate through the current challenges.

DIFC Investments

S&P said the company’s current credit metrics represent a meaningful buffer against the expected visible deterioration of operating conditions.

“We consider DIFCI to be a government-related entity that has a very high likelihood of receiving timely and sufficient extraordinary support from the Dubai government if it faced financial distress. We, therefore, continue to include one notch of uplift into our rating on DIFCI for extraordinary government support,” S&P said.

“The negative outlook reflects the possibility that our expectation of the Dubai government’s ability to provide extraordinary financial support to DIFCI, if needed, could weaken in the coming one to two years. This could be the case if a prolonged downturn in the real estate market and COVID-19 significantly weighed on macroeconomic conditions and increased pressure on government finances.”

The health crisis has been viewed as the biggest challenge to economies around the world since the global recession in 2008. The series of lockdowns, travel restrictions, temporary closures of commercial establishments are costing businesses billions of dollars in revenues.

(Reporting by Cleofe Maceda; Editing by Mily Chakrabarty)


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