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UAE's strong rebound seen to underpin real estate buoyancy

The rating agency said homebuilders’ credit quality will improve, benefiting from strong demand in the off-plan market

Buoyancy in the UAE property sector is likely to be underpinned by a strong economic recovery led by hike in oil production, higher energy prices and a rebounding services sector, though threats to this scenario are rising, analysts at Moody’s Investors Service said.

"We forecast the UAE’s real GDP growth of six to seven per cent in 2022 and the credit quality of UAE real estate companies we rate to remain broadly stable in the next 12-18 months," said Lahlou Meksaoui, vice-president and senior analyst at Moody's.

"However, more dangerous waves of Covid-19, higher inflation, rising interest rates exacerbated by the Russia-Ukraine conflict, and fears of recession in US and Europe pose risks to the economic recovery."

Despite these risks, the country's management of the pandemic and introduction of new residency visas had already led to a rebound in the labour market, a key housing demand driver.

The rating agency said homebuilders’ credit quality will improve, benefiting from strong demand in the off-plan market. Off-plan property sales will remain high for Emaar Properties and Aldar Properties, with positive investor sentiment supporting solid demand, especially for high quality projects.

“Average residential prices will stabilise or moderately soften in the next 12-18 months. Homebuilders’ margins could narrow because raw material prices are rising but most have fixed their costs in contracts.”

Moody’s analysts observed that Dubai's population has grown over the last few years and this is credit positive because population growth will contribute to balance residential market supply and demand. According to the Dubai Statistics Centre, Dubai's population has grown 3.4 per cent a year on average since 2017 and 3.6 per cent since the last quarter of 2021.

“We do not expect the UAE's new corporate income tax to weaken its regional competitiveness or business environment. The UAE's 9.0 per cent corporate tax rate remains lower than in other GCC countries,” they said.

“Retail sales in the UAE will remain exposed to weaker consumer confidence as inflation accelerates. We expect average rents to be stable in the next 12-18 months. In the office segment, we expect moderate average rent increases for DIFC Investments because demand for high quality office buildings remains high and supply is tight,” they said.

However, for the global office sector, shrinking demand will pressure the credit outlook, according to an S&P Global Ratings. A resurgence of Covid cases, along with commuting and safety concerns, have delayed the return to office, and employees are settling into rituals of remote work. Despite increased vaccination rates and a lower death rate from Covid, office utilization remains low globally.

"We expect office landlords to face several years of slow growth, with weaker prospects for leasing and fewer new development projects," said Ana Lai, an analyst with the ratings agency.

"Tenants are reconfiguring the workspace to adapt to the hybrid work model, leading to an overall reduction in footprint in many cases. As a result, landlords will likely need to keep rent concessions high to attract tenants, pressuring profit margins and cash flow."

Analysts at Moody’s argued that tightening financial markets did not pose an immediate threat for companies they rate. As financial markets remain volatile and interest rates rise, there is a risk of an extended squeeze on liquidity which will limit capital market access. This will increase the cost of debt for floating rate borrowers and those who need to refinance their debt, they said.

“Higher borrowing costs will dampen investor demand and make access to capital for smaller companies more difficult. However, all companies we rate have enough liquidity to cover debt maturities for the next 12-18 months. Good unencumbered asset and interest coverage ratios will support stable credit quality,” said Hormazd Motafram, associate analyst at Moody’s.

— issacjohn@khaleejtimes.com