Dubai real estate stocks were once the stars for investors betting on the city’s booming economy. But their fall from grace was spectacular and seems set to continue, given the abundance of unsold homes and the scant prospects for recovery in the oil-rich region.
Shares in Emaar Properties, the bellwether industry and the developer of Burj Khalifa, the world’s tallest tower, fell almost 80 per cent from their peak in 2014, when average real estate prices in the Emirate were about 30 per cent higher. The competitor Damac Properties Dubai Co. has had a similar slump since 2017. Union Properties, which is engaged in debt restructuring negotiations, trades at a 90 per cent discount from its 2005 level.
Not even a majority of analysts’ purchase recommendations, thanks to cheap valuations and expectations of government support, are enough to stimulate a change in sentiment. This reflects the supply glut that the companies themselves helped to create, which is deteriorating as a result of the departure of many expatriate workers who make up the majority of the city’s population.
“I’ve looked at Dubai ‘s assets several times in the past, but the picture has remained unchanged every time, precisely because of the same issues – huge unsold stock levels and continued development,” said Ekaterina Iliouchenko, portfolio manager at the Union Investment Privatfonds in Frankfurt.
An index tracking eight Dubai real estate stocks is trading near the biggest discount to peers in emerging markets since 2011.
In recent days, the audit of real estate developers and construction companies has intensified as the shareholders of Arabtec Holding, which helped to build Burj Khalifa, voted to dissolve the firm. The collapse of the company sends an alarming signal about the outlook for the construction sector in the United Arab Emirates, CI Capital Analyst Sara Boutros wrote in a note.
Macroeconomic prospects for Dubai and the region add to the plight of the property industry. Dubai ‘s economy may contract “sharply” by around 11 per cent in 2020, as its high exposure to tourism and aviation puts it in a more vulnerable position to the effects of covid-19, according to S&P Global Ratings at the end of September. Gross domestic product is expected to recover to 2019 levels by 2023.
Geopolitical tensions are another issue on the investor list of concerns, according to Harshjit Oza, Head of Research at Abu Dhabi-based Shuaa Securities LLC. Emaar Properties and other stocks in the sector have been heavily sold in times of growing tension in the region, such as when oil tankers were attacked in the Gulf of Oman last year.
“I don’t think investor appetite will return before a recovery in oil prices and a turnaround in the geopolitical situation,” Oza said by phone. “Investors are shy of buying more risky stocks, especially those of companies that do not have a healthy balance sheet or do not pay dividends.”
Emaar said in March that it wouldn’t distribute a payout for shareholders on its 2019 results. Damac also skipped the dividend for 2019, after having posted the first annual loss in nine years. Last year, MSCI Inc. removed the stock from the index compiler ‘s popular stock market benchmark, reflecting the market value slump, and moved it to the small-cap group in May.
To be sure, the prospect of a weaker US dollar for a long period of time could help the industry in Dubai, as the UAE’s dirham is stuck to the greenback, according to Vijay Valecha, Chief Investment Officer at Century Financial Consultancy LLC.
But this isn’t enough to lead to a quick turnaround, he warned. “It will take a some time for this theme to play out,” Valecha said in an email. “The real estate has a long cycle and the recovery is painfully slow.”
The DFM Real Estate & Construction Index is down 29 per cent this year, compared to a 20 per cent drop in Dubai ‘s main index and a 23 per cent drop in the benchmark tracking of 70 properties in developing countries.
“We see no chance of an immediate recovery for these companies unless they start reporting good numbers,” said Oza from Shuaa Securities.