Since S&P Global Ratings' last publication on Dubai real estate on Feb. 18, 2019, we believe residential prices have fallen by about 10%, while the outlook remains weak in the fourth quarter as new supply hits the market. Real estate services company Asteco's third-quarter 2019 report suggests Dubai apartment and villa prices have declined 35%-38% since their peak in second-quarter 2014. We believe prices are approaching levels seen at the bottom of the last cycle in 2010, and even lower on an inflation-adjusted basis and considering sales incentives for off-plan property.
Rating pressure on developers has been quite significant in 2019. On Aug. 28, we took our second negative rating action of the year on Damac Real Estate Development Ltd. (B+/Negative/--), lowering the long-term issuer credit rating to 'B+' from 'BB-'. This reflected our expectation of weakening credit metrics over the next two years due to declining residential property prices in Dubai and lower pre-sales, operating margins, and profitability (see "Dubai-Based Damac Real Estate Development Downgraded To 'B+' On Weak Market Prospects; Outlook Negative," published on RatingsDirect). Our other rated developer in Dubai is Emaar Properties PJSC (BBB-/Stable/--) whose credit ratios have weakened in the first nine months of 2019 largely on the back of a temporary delay in property handovers. However, we expect a number of handovers in next six-to-nine months that will support debt to EBITDA of below 2x and funds from operations to debt of more than 45%.
Below, we address some of the questions investors have asked us about Dubai's real estate market and the direction in which it is heading.
Frequently Asked Questions
What is our expectation for Dubai residential property prices in 2019-2020?
In our base case published in February 2019, we estimated residential prices would fall 5%-10% in 2019, and potentially 10%-15% under our stress case. According to Asteco's third-quarter 2019 Dubai report, apartment and villa prices have declined 13%-14% over the past 12 months. This compares with real estate services firm JLL's third-quarter 2019 report, which indicates prices are down 7%-9% over the same period. Based on this data, our stress case could occur by year-end 2019 because developers are continuing to launch new projects (although fewer than previously) at lower margins or on a speculative basis, with small deposits and long-term payment plans. This has increasingly put development risk and the burden of funding on developers' balance sheets.
We expect prices to remain under pressure during 2019-2020, and don't foresee a meaningful recovery in the near term due to the current supply-demand imbalance. Dubai's hosting of the 2020 World Expo (Expo 2020) is expected to attract millions of visitors to the emirate, which may have a positive effect on market sentiment. However, because the price decline has been gradual relative to the previous cycle, we believe it will take longer for a meaningful recovery.
What effect do you think Expo 2020 will have on the real estate market?
We believe Expo 2020, just on the back of potential visitor flows to the emirate, will ease temporary pressures on hotels and retailers. However, it is unlikely to materially improve long-term conditions in the real estate sector.
We expect a marginal pickup in Dubai's economic growth to 2.4% in 2019, with support coming largely from the construction and real estate sectors. Furthermore, we expect Expo 2020-related infrastructure projects to be completed and additional residential housing supply to enter the market from existing projects this year. A boost to tourism and related spending linked to Expo 2020 should spur somewhat stronger growth in 2020. However, we believe economic growth will likely ease after the expo to about 2% through 2022, with traditional growth engines such as trade and transportation the main drivers. Although we expect demand created by Expo 2020 to temporarily ease market pressures, Dubai's commercial real estate segment might suffer from oversupply after the event, further reducing real estate companies' financial cushion.
What is our view on Dubai office, retail, and hotel trends and their effect on rated real estate issuers?
We don't believe that office rents have bottomed out yet. Although new supply is reportedly limited, government initiatives like the "One Free Zone Passport" and dual licensing, as well as the emerging popularity of co-working spaces, are acting as a disruptor for those offering traditional office space.
We also expect the Dubai retail real estate sector to feel the squeeze due to the sluggish economy, which doesn't encourage spending; growth in online shopping; and more cost-sensitive tourists. In particular, we expect occupancy and rentals to deteriorate because about 1.5 million square meters of gross leasable area (40% of existing stock) is expected to be delivered through 2021, according to JLL.
Oversupply continues to trouble the Dubai hotel industry, although 2020 brings some hope for recovery due to the expo. Increased competition and a profitability squeeze are likely to maintain pressure on the hotel sector in 2019, however.
We expect the ratings on Dubai-based real estate investment companies (that generate rental income) will remain resilient. We are seeing softening rental prices and portfolio valuations, but all of our rated real estate companies-- Majid Al Futtaim Holding LLC (BBB/Stable/A-2), DIFC Investments Ltd. (BBB-/Stable/NR), and Emaar Malls PJSC (BBB-/Stable/--; rating linked to parent company Emaar Properties)--have secured long-lease tenures in desirable locations, very high asset quality, and more than 90% occupancy across their portfolios.
How do these real estate pressures impact our banks and insurance ratings?
In our view, risks related to the real estate sector are well reflected in the current ratings on banks in Dubai. Lending to the residential real estate and construction sector stood at United Arab Emirates (UAE) dirham (AED) 333 billion as of Sept. 30, 2019, which is slightly above 20% of the AED1.5 trillion in total domestic credit extended by banks. Despite recent real estate price trends and banks' exposures in real estate and construction increasing by about 9% in the first nine months of 2019, the asset-quality indicators of rated UAE-based banks remained resilient. Under our base case, we expect cost of risk to increase and stabilize at 100 basis points (bps)-150 bps over the next 12-24 months. UAE banks have adequate cushions to face gradual asset-quality deterioration, based on their sufficient loan loss reserves built since 2010 and thanks to International Financial Reporting Standards (IFRS) 9 implementation. If real estate prices continues to drop, credit losses might edge up and the stock of Stage 3 loans could increase beyond our current expectations. This would in turn reduce banks' profitability and could put pressure on ratings.
At year-end 2018, the 30 listed insurance companies operating in the UAE had total real estate exposure of about AED6 billion, representing on average about 20% of their total invested assets. The real estate exposure of branches of foreign insurers operating in the country is almost negligible. We believe our current ratings on UAE insurers capture risks related to the real estate sector. Although most UAE insurers are well capitalized, we believe that any further decline in real estate valuations could bring volatility to their capital and earnings, which may weigh on the credit quality of some companies over the next 12-24 months. This applies particularly to insurers with significant exposure to real estate investments. Under the new solvency regulations implemented in the UAE from the beginning of 2018, any real estate investment in excess of 30% is not eligible for inclusion when calculating an insurer's solvency ratio. As a result, some insurers with real estate exposures significantly in excess of these limits have found themselves in breach of solvency regulations and are now under regulatory scrutiny. Any future investment in the real estate sector by an insurer will generally depend upon its solvency ratio. However, some insurers that meet regulatory requirements are continuing to develop real estate on their land investments in hope of achieving a better return. This will not only add more supply to the market, but also might constrain the credit quality of these insurers. This is due to their increased exposure to real estate assets, which we consider illiquid when calculating an insurer's liquidity.
Do you believe regulation is supportive of the residential real estate market?
The "Higher Real Estate Planning Committee" was established in September 2019 to manage demand-supply imbalances in the Dubai market. It will also develop a comprehensive strategic plan and vision for all major real estate projects in the emirate for the next 10 years. Exactly how the committee will operate and its effect on the market is unclear. With 122,000 units still to be delivered over the next 24-30 months (JLL third-quarter 2019 report), which are presumably largely pre-sold, any meaningful halt to supply will be post 2022.
Chart 1
Related Research
S&P Global Ratings research
- What Is Our Credit View Of Dubai?, Sept 3, 2019
- S&P Global Ratings Lowered Its Henry Hub Natural Gas Price Assumption For The Rest Of 2019 And For 2020, 2021; Long-Term U.S. Natural Gas, Canadian AECO, And Crude Oil Price Assumptions Unchanged; Jul 30, 2019
- Dubai-Based Damac Real Estate Development Downgraded To 'B+' On Weak Market Prospects; Outlook Negative; Aug. 28, 2019
- Dubai Real Estate Downturn To Continue: Projections And Ratings Impact; Feb 18, 2019
Other research
- UAE Real Estate Market Overview Q3 2019, JLL
- Property Review, UAE Real Estate Report Q3 2019, Asteco
This report does not constitute a rating action.
| Primary Credit Analyst: | Sapna Jagtiani, Dubai + 97143727122; sapna.jagtiani@spglobal.com |
| Secondary Contacts: | Shokhrukh Temurov, CFA, Dubai + 97143727167; shokhrukh.temurov@spglobal.com |
| Puneet Tuli, Dubai +971 4 372 7157; puneet.tuli@spglobal.com | |
| Sachin Sahni, Dubai (971) 4-372-7190; sachin.sahni@spglobal.com | |
| Timucin Engin, Dubai (971) 4-372-7152; timucin.engin@spglobal.com | |
| Tommy J Trask, Dubai (971) 4-372-7151; tommy.trask@spglobal.com | |
| Additional Contact: | Industrial Ratings Europe; Corporate_Admin_London@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.