International litmus test

Damac Properties’ stock market debut will test global confidence in a rebounding Dubai property sector. Published in The Gulf, December 2013

Damac Properties was preparing to become the first Dubai real estate firm since the 2008 crash to float its shares on a stock market, as The Gulf was going to press. The emirate’s property market was sent into a deep slump five years ago, but the memories of that downturn increasingly feel like a distant nightmare.

The rise in property prices this year has been so fast that some have warned the market is again at risk of over-heating. The authorities appear more aware of the problem than during the last boom, although the measures they have taken to calm the market are still rather limited. So the Damac listing on the London Stock Exchange (LSE) will provide a timely indicator of how convincing the recovery story is to international investors.

On the surface, many of the market indicators look healthy. According to London-based Capital Economics, Dubai’s economy grew by 4.9 per cent in the 12 months to the end of June, up from four per cent in 2012 as a whole. In late November, as Damac was preparing to list its shares in London, those of other real estate firms on the Dubai Financial Market (DFM) were generally trading towards the top end of their 52-week range, although in most cases they remain a long way off their historic highs. And the profits at local developers such as Deyaar Development and Emaar Properties were up in the first nine months of this year compared to the same period of 2012.

Such facts will have helped Damac’s chairman and founder Hussain Sajwani as he went on an investor roadshow that took in Europe, North America and the Middle East in the run-up to the listing, which late in the day was pushed back from 27 November to early December.

Sajwani should also have been helped by the fact that the international investor appetite for shares in property firms is strong at the moment. Statistics from Thomson Reuters show that real estate companies have raised $92.6 billion so far this year, the highest figure since 2007. Only financial firms have issued more equity in 2013.

Damac itself is doing well. In 2012 it made a profit of $212 million on revenues of $692 million. It performed even better in the first half of this year, with a profit in the six months to 30 June of $332 million and revenues of $632 million. And it is worth noting that the company was not pursuing its LSE listing because it needed to raise more capital. All of the shares on offer were being sold by Sajwani.

But alongside all these positive signs are some contradictory signals about what is happening in Dubai. In particular, there has been some disquiet about just how fast prices are rising. The cost of residential property in Dubai was up by around 20 per cent in the past year, a faster rate than in any other major global market.

In October Jones Lang LaSalle, a real estate agent, issued a report saying that the rate of increases seen over the past year is unsustainable and cannot be supported by the fundamentals, suggesting that speculative activity is partly to blame. The market is not racing ahead at the same speed as it did in 2007 and early 2008, when villa prices were rising by 80 to 90 per cent a year, but there is clearly some reason for caution.

In an effort to counter the threats of another boom and bust, the UAE central bank has been trying to rein in some parts of the market. It is promising to introduce a mortgage cap for first-time buyers with a maximum loan-to-value ratio of 80 per cent for UAE nationals and 75 per cent for foreigners. Loans for second homes will have slightly tighter ratios, although it is not yet clear when these restrictions will be imposed. In addition, Dubai doubled the property transaction tax to four per cent in early October.

These measures have been welcomed by observers, although with some caveats. Egyptian investment bank Beltone Financial thinks the new mortgage regulations should increase confidence in the real estate sector and promote more realistic property prices, but in a statement issued on 30 October it added “we believe better results could have been achieved through linking lending caps to borrowers’ debt-servicing capability rather than a mere direct link between the loan and the property value.”

The impact of the mortgage cap will be more limited than it would be in some other markets because not many property buyers in Dubai take out a mortgage. Some 75 to 80 per cent to transactions are in cash. That may in part be because banks are more cautious these days and are unwilling to lend, particularly to international customers. In October the managing director of Damac, Ziad El Chaar, called on banks to provide more mortgages to non-residents.

“One of the most important factors which is still holding the market back and has not yet been recognised is the lack of mortgages,” he said. “Today, most of the business is still being conducted on equity, not leverage. I believe the banks remain too timid.”

Such issues matter to companies like Damac because the vast majority of its business is done in Dubai. It has been spreading its wings and has developments in Abu Dhabi, Riyadh, Jeddah, Beirut, Amman and Baghdad, but even so 85 per cent of its portfolio is still in Dubai.

A listing on the LSE will help to burnish its credentials as an international company. An executive close to the transaction explained the rationale for listing on the London market rather than one of the Gulf bourses, by saying “London is a deep market with a large number of institutional investors who are very knowledgeable about the real estate sector, the Middle East and emerging markets generally, so it’s a good place for Damac to be.”

To date relatively few Middle East companies have taken this option. Among the few are three other UAE companies, Al Noor Hospital Group, NMC Healthcare and port operator DP World, as well as Jordan’s Hikma Pharmaceuticals.

However, given the relatively underdeveloped nature of regional stock markets and their limited liquidity, it could become a path that more companies take in the future. “The more interesting listings are outbound listings,” says an equity markets consultant in Dubai. “There is an active pipeline with promising candidates coming to the market in the next 12 to 18 months.”

Over that time period it should also become clear whether the Dubai market can grow at a sustainable rate or whether another bubble is being inflated.