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HSBC Cuts Emaar’s Target price to Dh8.5

HSBC however, reiterated its overweight rating for the region’s largest property developer, saying “Emaar should be able to withstand the slowdown as a result of the expected scale-back in projects.”

“The estimates cut will reflect the likelihood of further market weakness,” said HSBC, citing its survey which showed Dubai property prices in December fell 23 per cent from their September peak. HSBC said the possibility of a more prolonged economic slowdown may force Emaar to postpone or shelve its projects until there are clearer signs of recovery.

The property sector in Dubai, the emirate’s major growth driver, has seen a surge in the last five years but has been hit hard by the global financial crisis, forcing developers to put at bay their projects as liquidity dried up.“For UAE sales projects, we assume the cancellation of all future projects and only include those that are near completion. We also apply a 50 per cent probability to all international projects.”

The bank expects the occupancy of Emaar’s retail and commercial buildings to drop 50 from 60 per cent in 2009 and 60 per cent from 70 per cent in 2010. For Emaar’s hotel business, occupancy is seen scaling back to 50 per cent in 2009 and 60 per cent in 2010, from 75 per cent in both years.

“The sheer scale of development at Emaar will stretch management and operational capacity, introducing the risk of delays and/or even project cancellation.” The current oversupply also has negative implications on future sales and could force Emaar to abandon some projects, said HSBC.

The upside is that “any decision to slow down on its projects limits the need to reinvent cash flow in the near term and serves to strengthen the balance sheet (of Emaar).”

“We estimate that if Emaar were to drastically scale back projects, net cash could increase to around Dh11.5 billion by 2010, from our previous estimate of Dh300 million.”

HSBC said that Emaar has also responded well to the property crisis by adjusting its strategy and shifting its focus from high-end developments to more affordable mid-income housing.

Moreover, while property prices fell in the fourth quarter, the market continues to clear stock, with volumes in the first two weeks of January going up 6 per cent from the previous month which “signals a return of confidence and liquidity to the property sector.”

Emaar shares on Wednesday ended 9.75 per cent down to Dh1.85.

rocel@khaleejtimes.com