The bursting of Dubai’s property bubble in 2009 led to a more cautious attitude towards the real estate sector. A number of regulations were put in place to discourage the flipping of residential units and confidence in property as an asset class has been restored, with prices rapidly moving towards the levels achieved prior to the global financial crisis in 2008. However, the effects of the crash can still be felt: government and state-supported companies in the emirate have debt obligations of more than $50bn that will mature by 2016. For example, in May 2014 the IMF cautioned that stronger regulations might be needed to dampen speculation. As such, major concerns remain over the sector’s ability to withstand a market correction.
While the Central Bank of the UAE (CBU) has stated that equity buyers and external funding, rather than local bank financing, are driving real estate expansion in the market, the level of exposure of UAE banks to the property industry is approaching pre-crisis levels. At the end of 2013, Dubai banks’ exposure to the real estate market was just below 23%, according to the annual financial stability report of the CBU. In September 2009 the figure stood at 26%, according to Markaz, a Kuwait-based investment bank, although in January of that year Credit Suisse estimated that it could be as high as 35%.
Lending to the sector increased by just over 10% in 2013 – one percentage point above the overall loan growth rate, according to the CBU. While construction loans rose by 40.1% in December 2013 – the biggest increase since June 2009 – the financing environment remains challenging for developers. “The issue is funding and how these projects are financed. There is still a lot of debt in the system,” said Craig Plumb, the head of research for the MENA region at Jones Lang LaSalle. Developers themselves are also more wary in their approach following the crisis years. “As Dubai’s property sector rebounds, investors are now placing greater emphasis on minimising risk, and developers are responding by revising the financial structure upon which their projects are sold,” Kabir Mulchandani, the CEO of Skai Holdings, told OBG.
Many developers were previously using revenue from off-plan sales to fund the construction of projects. Given specific regulations targeting the off-plan market, including a 50% cap on mortgage values, the number of off-plan sales has fallen, with local brokers estimating a current annual figure of 2000 to 3000 units sold under this model. Total unit and building transactions in 2013, including mortgage transactions, reached 46,847. “Developers realise that they can’t rely on off-plan sales for funding and they are moving towards equity plays,” Plumb said.
Whether this will lead to a raft of private equity deals or initial public offerings (IPOs) is unclear, but in September 2014 the government-backed developer, Emaar, made a big statement with the largest IPO in Dubai since 2007. The share sale in its retail subsidiary Emaar Malls Group raised Dh5.8bn ($1.58bn), giving it the third-largest market value on the Dubai Financial Market. Shares of the new listing jumped by 21% on the first day of trading, a strong indication of the ability of developers to raise equity funding.
However, Rehan Akbar, an analyst for EMEA corporate finance at Moody’s Investors Service Middle East Department, told OBG that the IPO of Emaar Malls Group was not driven by funding demands. Emaar Properties has a large land bank supported by government land grants, and given the strong relationship with the currently liquid banks, accessing finance is less of a challenge. Instead, the move had other positive impacts for the firm and the wider market. “The IPO ticks a number of boxes,” Akbar said. “It shows that Dubai and the equity market have recovered and it was a means to distribute cash to the shareholders of Emaar Properties. The IPO was executed at the right time as the current oil price slump has dampened new listings now. For the broader analyst community, the listed stock helps to place a valuation against a very strong and recognisable asset.” In many respects, Emaar is a standout player in the market. “During the 2009-10 crisis, Emaar had just completed Dubai Mall and hence was not burdened with significant capital expenditure going forward,” Akbar said. “Compared to competitors, Emaar entered the crisis with one of the strongest portfolios of assets, which generated recurring cash flows and assisted it in supporting its debt obligations. It also managed its liquidity better than many others.”
Moreover, the developer benefits from government land grants, which means it can attain gross margins of around 50%. The percentage of units sold through mortgage arrangements is much higher in Emaar developments than the market average. For example, the company’s Arabian Ranches villa development had a mortgage transaction level of 50%, compared to the market average of 28%, according to a study by Reidin and Unitas. The developer has also taken steps to restrict the involvement of speculators in its projects, prohibiting the resale of units before 40% of its total value has been paid.
Paying Down Debt
Concerns have been focused on the dwindling presence of private developers in the market. Even Emaar suffered in relation to the cost and terms of financing during the recovery of the last five years. For smaller-scale private developers, the environment has been harsher. “Smaller developers are going to get crowded out,” Akbar said. For these companies, it can be more difficult to meet the capital requirements for selling off-plan and to retain investment property for recurring income. “We’re seeing less involvement from private developers than in the last cycle,” said Matthew Green, the director and head of research at CBRE in the UAE. “If you’re building something that’s not income-generating, there’s an issue finding funding.”
Given the increased down payment requirements for mortgages, and the difficulties of project funding for developers, some companies are offering more generous payment plans to attract off-plan customers and raising funds. These can be as low as 20% of the total sales price with 80% due upon the completion of the unit, according to Akbar. The low down payment cost, potentially lower than the mortgage deposit requirement, could attract speculators who are keen to flip a property.
While the off-plan market is more muted than it was prior to the last crash, it still remains an area of concern for developers and customers alike. “The big question is whether the off-plan market overheats, especially with developers offering loose payment plans,” said Akbar. “The 20% down payment structure is high risk and these projects could disappear very quickly.” At the same time, the incidence of flipping is less pronounced in the current market. Coupled with the more studied approach of government-backed developers like Emaar, therefore, the market is in a much healthier place than it was in 2008.