Dubai realtors face major refinancing risks: Fitch

“The sector, which will be under pressure for at least 2012-13, is likely to see a period of stagnant growth at best, and a ‘double-dip’ contraction at worst,” said Bashar Al Natoor, Director at Fitch’s Europe Middle East Africa, in an e-mailed report.

“Despite signs that conditions may be stabilising, as well as a recent round of debt restructurings and extensions, Fitch believes that the credit outlook for the sector remains negative,” he said.

Property prices in Dubai fell by 55 per cent since mid-2008 mainly because of the financial crisis, prompting some foreign homeowners to stop paying off mortgages and leave the country. Some analysts expect property prices to dip another 20 to 40 per cent.

Without a significant improvement in market conditions, sizeable disposals or additional equity raising, and significant government support, it is unlikely that developers will deleverage quickly enough to repay the upcoming 2011-2012 maturities from internal resources, Fitch said.

Fitch expects Dubai’s real estate and construction fundamentals to continue weakening, with increasing customer delinquencies, limited liquidity, and a continued historical reliance on short-term maturities even as the world economy begins to recover from recession.

“Oversupply, limited mortgage availability and rising interest rates will also pose significant constraints for real estate companies and buyers,” Fitch said.

The ratings agency warned that the availability and the cost of debt for Dubai, and subsequently the corporate sector, was also likely to deteriorate and result in investors demanding higher risk premiums. “This trend is already being reflected in credit default swaps, which have increased in the GCC states, with Dubai being the worst affected.”

On the Dubai Land Department’s new “Tayseer” initiative announced on July 10, Fitch said projects qualified under this scheme should meet a required criteria to be classified as “tier one” and the UAE’s leading financial institutions will now join the exclusive list of bankers authorised to offer funding to Tayseer “tier one” rated Dubai real estate projects.

Fitch also notes that Dubai will be offering government guarantee, through the Land Department, for Tayseer qualified projects. The agency will continue monitoring this new development and, upon receiving more details, will assess its impact as it could enhance liquidity and transparency in the sector.

Dubai market rents to continue to decline for the next 12 to 18 months, Fitch said. “A weak residential, office and retail environment has caused developers to reduce rents to prevent tenant defaults. Weak demand has led to a substantial decrease in developer earnings, cash flows and asset values, and in turn created covenant problems and liquidity pressures. This has severely impacted some of the industry’s largest players,” it said.

issacjohn@khaleejtimes.com