Residential property prices fell by 6.86% during the year to 2Q19, which is the 18th consecutive quarter of year-on-year (YoY) price falls. House prices have fallen by as much as 40% since their peak [in mid-2014], RedSeer Consulting partner Sandeep Ganediwalla said.

But despite this, the market has reason to be optimistic. The real estate market in the region saw property sales hit a four-year high this month. Additionally, the authorities have now established a government committee to oversee its housing market.

These conflicting forces have led to the disagreement amongst two buysiders, one consultant, one banker and an analyst polled by Debtwire as to where the property market is headed.

S&P Global Ratings anticipated in February 2019 that property prices will fall by between 5% to 10% in the calendar year of 2019, with no expectation of a meaningful recovery coming before 2022.

“Since that prediction, prices have already fallen by about 10%. The outlook is still weak, and it wouldn’t surprise me if there were further declines,” said Tommy Trask, a director at S&P Global Ratings.

Subdued house prices are a factor of excess supply. The oversupply in 2019 is of the order of between 7,000 to 10,000 units, according to regional developer Emaar Properties’ management.

For an economy that generates 13.6% of its GDP from the real estate sector, this recent market weakness has taken a toll – Dubai is experiencing its lowest level of growth since the 2009 crisis.

But excess supply persists in the market because companies can still churn a profit, said Trask. Emaar, for example, generated a net profit of AED 3.1bn in 1H19. Companies are able to do so as a result of the result of the high price of housing in Dubai, Ganediwalla said, prompting talks of a possible rent freeze in the emirate.

But others are more confident the real estate market is over the worst. “Things are on the up,” said a senior researcher at a regional bank. “It’s the first time in 2019 that we’ve seen two months of consecutive growth in the Dubai Residential Property Sales  Price Index (DRPSPI)”.

“The recovery will be long and slow, but it will happen. What is especially important is the rise of Chinese investments into the region,” said the researcher. “As long as China continues to grow, I’m confident in the Dubai property market.”

Indeed, orders from Chinese investors made up some 14% of Emaar’s billed revenue in 2018 – up from less than 5% just two years ago, company management said during an earnings call earlier this month.

The government reacts

In a rare public intervention, the Government of Dubai is now taking steps to rebalance its housing market. A Higher Real Estate Planning Committee was established this month to manage excess supply in the market.

It will also ensure that semi-government real estate companies do not compete with private  developers, Sheikh Mohammed Bin Rashid Al Maktoum said. “It [the committee] will develop a comprehensive strategic plan and vision for all major real estate projects in the emirate for the next 10 years,” continued Sheikh Mohammed.

“This could be a real game changer. It’s what has been missing for the last decade,” S&P Global Rating’s Trask said.

However, exactly how the committee will work remains unknown. For example, it is not clear whether property developers will have to abide by legally binding production limits and how such decisions will be made.

Many hope Dubai’s Expo 2020 – a lavish world fair planned by the emirate – will also bring a welcome boost to its real estate sector. Expo 2020 is expected to bolster Dubai’s sluggish economy and is estimated to attract around 25m people to the country.

But not everyone is convinced. “Expo 2020 is unlikely to have a material long-term improvement on the property sector,” continued Trask. “It will likely most benefit the hotel industry, which currently has a high level of over-supply matched with a static number of tourists per annum.”

Beyond efforts geared towards the real estate sector, the government has also implemented more general policies aimed at making Dubai’s economy more competitive, noted Ganediwalla.

“Dubai has established technology focused free zones, long term residency visas and on-arrival visas for investment heavy countries such as China. It has also been hosting large events with an eye on the FIFA World Cup and potentially hosting [the] Olympics.”

Corporates navigate the stormy seas

The difficult real estate market in Dubai has created problems for many contractors in the region. A company’s ability to survive the beleaguered market largely depends on the stability of its revenues and its relationship with the government, agreed two London-based fixed income investors.

Association with the government can make all the difference, as can be seen in the case of Meydan, a Government of Dubai-owned developer facing a wave of litigation. All legal claims against the firm were suspended in June, according to a report by the Financial Times.

The government allegedly ordered the local courts to suspend claims against Medyan City Corporation, its subsidiaries and affiliates, pending the formation of a special judicial committee.

The importance of government support can clearly be seen by comparing two companies: Damac Properties and Emaar, argued one of the fixed income investors.

Damac, a Dubai-based private property developer, has struggled in the soft real estate market. Its net profit fell by 94% in 1Q19 to the lowest level since its IPO in 2015.

Meanwhile, Emaar – just under 60% of which is owned by government related entities – is hailed as Dubai’s blue-eyed boy, through its generation of consistently strong profits and free cash flow generation. The company’s USD 500m 3.875% 2029 sukuk, placed earlier this month, was nearly five times oversubscribed.

“Those who aren’t associated with the government, like Damac, have fared much worse than the government preferred contractors, like Emaar,” the fixed income investor said.

“Having the government on your side is always a good thing [in Dubai] – especially for the acquisition of cheap land,” added the second fixed income investor. However, the divergence of Damac’s and Emaar’s results is due to the differing composition of their earnings, he argued.

Some 31% of Emaar’s revenue is recurring (principally from its malls), whereas Damac is a pure developer, the investor said, allowing Emaar to better hedge against the market downturn.

Light at the end of the tunnel

The Dubai property market has caused problems to varying degrees for corporates operating in the region. A revitalisation of the market will provide much-needed respite for all involved – regardless of how well hedged their operations or connected their board.

But with sales picking up and a government seen to be acting, some now hope there is light at the end of the tunnel. While this remains to be seen, early indicators such as the DRPSPI index and sales rising to a four-year high are certainly welcome news.

Alexander Dooler Credit Markets Reporter Debtwire

Alex Dooler is a Credit Markets Reporter at Debtwire CEEMEA, covering distressed debt and corporate restructuring across the region. Previously, he had worked at AIG analysing corporate credit and working on distressed workouts. 

Alex was awarded a First-Class Honours in Economics from the University of Nottingham.