UAE real estate firms hit by coronavirus, oil price slump
DUBAI
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UAE's real estate companies have been hit by the double whammy of Covid-19 pandemic and slumping oil price, according to top ratings agency Moody's.
Operating environment is set to weaken as economy slows on oil price decline and coronavirus effects, stated Moody's in its latest report.
"The economic contraction and its fiscal implications will be most acute in Dubai, where the economy is very reliant on tourism and transportation," remarked Lahlou Meksaoui, Lead Analyst at Moody's.
The pandemic also coincides with a slump in oil prices, which will affect the non-oil economy by curbing foreign investment and eroding economic confidence, he stated.
According to him, Dubai homebuilders face further market weakening as demand continues to slow.
The gross profit margins of homebuilders like Emaar Properties (Baa3 negative) and
Damac Properties will continue to weaken as job losses and salary cuts curb local buyer
demand for new properties. Travel restrictions will reduce international demand, he explained.
Moody's said it expects Dubai’s homebuilders' credit quality to weaken in the next 12-18 months. The severity of the ongoing recession will lead to weaker gross profit margins and EBIT to interest expense ratios, as well as lower free cash flow The gross profit margins of Dubai's largest homebuilder Emaar and of Damac Properties will continue to weaken.
"We expect Dubai homebuilders' gross profit margins to contract because the prices of new residential build-to-sell properties sold will be lower. We also expect the real estate companies to stimulate demand by extending payment terms, such as post-handover payment plans, or by paying a proportion of costs such as service charges and Dubai Land Department fees," it stated.
"This will lead to weaker EBIT to interest expense ratios for Emaar Properties and Damac Properties," said the top ratings agency.
Job losses and salary cuts as a result of the economic downturn will result in subdued demand for properties from local buyers.
Meksaoui pointed out that travel restrictions too will reduce international demand. "As of December 31, 2019, international buyers represented around 50% of Emaar Properties' investor base. Lower interest rates as well as lower loan to value mortgage requirements for first time buyers will support demand," he stated.
However this will not completely offset weaker consumer sentiment during the next 12-18 months.
"We expect increased payment delays to result in slower cash collections for properties sold. This in turn will increase working capital funding gaps for homebuilders and reduce free cash flow, Meksaoui added.
During the past four years, Emaar Properties' working capital outflows have increased significantly, by about AED27 billion ($7.3 billion). This is partly due to post-handover payment plans, where buyers can delay paying the full property price until after they move in.
This results in lower cash collections during the construction period and increases the risk to liquidity. However, as of March 31, 2020, the percentage of cash collection across property development projects in Dubai was 55% on average.
This leads us to believe that a significant portion of construction costs will now be covered by cash already collected, said the top ratings agency.
Retail and hospitality exposure will drive commercial real estate sector credit quality. The interest coverage and debt to Ebitda ratios of Emaar Malls (Baa2 negative) and Aldar Investment Properties (Baa1 stable) will weaken as revenue from retail tenants slumps, with only a partial recovery in 2021, it added.
According to Moody's, the coronavirus headwinds are likely to be less severe for real estate companies in Abu Dhabi in the next 12 to 18 months.
There is less of an imbalance between residential supply and demand, and so prices will probably not decline as much in Abu Dhabi as they will in Dubai. This will support the credit quality of Aldar Investment Properties, Aldar Properties (Baa2 stable) and Emirates Strategic Investment Company (Baa3 stable), it stated.
Fewer foreign investors buy Abu Dhabi property, while the emirate is wealthier than its neighbours, said Moody's in its report.
Strong liquidity and conservative financial policies will help weather the downturn. While the operating environment is deteriorating, conservative financial policies and strong liquidity will remain a credit strength for the UAE real estate companies, it added.-TradeArabia News Service
