Excess supply is the result of the flurry of construction in Dubai in the run up to Expo 2020
Conservative financial policies and strong liquidity will remain a credit strength for the UAE real estate companies while their operating environment continue to deteriorate as the economy slows on oil price decline and coronavirus effects, Moody's Investors Service said.
"The UAE real estate sector has slowed significantly during the past five years and we expect coronavirus to further slow home sales and lower rental prices. We expect a decline in residential prices in the next 12-18 months because most UAE markets are still suffering from persistent imbalances as a result of excess supply," Moody's analysts Lahlou Meksaoui and Mario Santangelo said in their latest report.
They noted that the excess supply is the result of the flurry of construction in Dubai in the run up to Expo 2020 and of slowing demand growth. Residential real estate prices in Dubai and Abu Dhabi have fallen about 30 per cent and 28 per cent respectively since their peak in mid-2014.
"We expect Dubai homebuilders' gross profit margins to contract because the prices of new residential build-to-sell properties sold will be lower. 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," Moody's analysts said their report.
The report argued that the economic contraction and its fiscal implications would be most acute in Dubai, where the economy is very reliant on tourism and transportation. "The pandemic also coincides with a slump in oil prices, which will affect the non-oil economy by curbing foreign investment and eroding economic confidence."
The report said Dubai homebuilders face further market weakening as demand continues to slow. "The gross profit margins of homebuilders like Emaar Properties and Damac Properties will continue to weaken as job losses and salary cuts curb local buyer demand for new properties. Travel restrictions will reduce international demand. Retail and hospitality exposure will drive commercial real estate sector credit quality."
The impact of the pandemic is likely to be less severe for Abu Dhabi companies in the next 12-18 months, the report noted. "There is less of an imbalance between residential supply and demand, so prices will probably not decline as much in Abu Dhabi as they will in Dubai. This will support the credit quality of Aldar Investment Properties, Aldar Properties and Emirates Strategic Investment Company."
The report said job losses and salary cuts as a result of the economic downturn would result in subdued demand for properties from local buyers. "Travel restrictions will reduce international demand. As of December 31, 2019, international buyers represented around 50 per cent of Emaar Properties' investor base. Lower interest rates as well as lower loan to value mortgage requirements for first time buyers will support demand. However this will not completely offset weaker consumer sentiment during the next 12-18 months."
Moody's expect increased payment delays to result in slower cash collections for properties sold. This in turn will increase working capital funding gaps for homebuilders and reduce free cash flow.
The ratings agency expects the credit quality of commercial real estate companies exposed to the retail and hospitality sectors to suffer the most because of lower tourist arrivals and lower consumer spending. "Of the companies we rate Emaar Malls exposure is completely retail, while retail and hospitality comprised 56 per cent of Aldar Investment Properties' rental income in 2019," it said.
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