Dealing with the slowdown facing the United Arab Emirate real estate market was not easy for property developers in 2009. With project financing and mortgages less available as well as market sentiment at basement levels, both investors and end-users were reluctant to invest in a sector so heavily affected by the financial crisis.
“People were trying to keep their liquidity to themselves…so there was not that much interest in investing in real estate,” said Faisal Hasan, head of research at the Global Investment House, an investment company which manages real estate funds. With the preliminary fourth quarter and yearly numbers coming out, some developers managed to end the year in a relatively good financial position, while others suffered significant losses in profits and revenues.
“It was just a question of the degree of how negative those numbers were going to be,” said Zahed Chowdhury, institutional equity sales manager at Al Mal Capital, an investment bank with a large real estate portfolio.
Fourth Quarter Results
Emaar property was the best performing UAE developer in the fourth quarter, beating market expectations by recording a hefty rise in both profits and revenues. Aldar suffered substantial losses, while Sorouh and Union Properties, which both saw declines in net profits and revenues in the fourth quarter. Deyaar has not issued its last quarter numbers yet but said it had a 95 percent decrease in profit in 2009.
Chowdhury said that comparing fourth quarter results, or even yearly results of real estate companies, is rather inaccurate and is not a valid indicator of the health of these businesses since their sales do not happen continuously, but depend on when projects finish and when delivery takes place.
“While you are building, there is no revenue, but when you build it and sell it there is ‘100 percent revenue’ and the day after you sold it there is ‘zero percent revenue,’” he said. Therefore, he noted, what should be looked at is whether the company has delivered what it announced on schedule. Moreover, analysts Executive spoke to said that revenues and profits, although the most popular numbers, are not enough to indicate whether the company is solid financially. It is also important to look at the balance sheet and the net debt-to-equity ratios of these companies. For example, both Aldar’s and Union Properties’ net debt-to-equity ratios are 115 percent, Emaar’s is more than 20 percent and Deyaar’s and Sorouh’s are negative (because of negative equity resulting from asset values falling below outstanding loan values), according to a fourth quarter report the HC Services and Investment’s brokerage arm.
“In Aldar’s case, [the debt] it is going to be a stress for the business while in Emaar’s it will not,” said Chowdhury. It will also affect the company’s ability to acquire financing.
“For example if Emaar wanted to raise money it would be able to because it doesn’t have that much debt on its balance sheet, and also it has rental properties and that can be used as underline collateral. But, in general, lenders are still very risk averse,” said Sana Kapadia, vice president of equity research at EFG Hermes.
Low financing slows the market
Since the financial crisis began and banks started to tighten loan requirements, both project and mortgage lending have been hard to obtain, which limited both demand for, and the supply of, new projects. Charles Neil, chief executive officer of real estate firm Landmark Advisory, said that in the fourth quarter only about 14 percent of transactions executed by the company were financed by banks, while the rest was personal financing.
“The commercial banks don’t seem to have much risk appetite for new lending in the property sector so they have been lending at very low loan-to-value ratios,” he said. The Dubai World debt crisis, which erupted in the last quarter of last year, also put more pressure on financing and affected companies’ fourth quarter results. “You can’t really exclude the Dubai World factor from fourth quarter of 2009,” said Saud Masud, head of research and senior analyst at the real estate department of UBS. “It put more pressure on financing, which also put more pressure on project activity, so it forced companies to either delay projects or to see more challenging adoptions in terms of demand.”
In its preliminary results, Emaar announced a 94 percent increase in fourth quarter revenues and a net profit of $196 million compared to a loss of $662 million in 2008. Emaar’s net profit beat Credit Suisse estimates by 39 percent, but was in line with the Bloomberg consensus numbers. The increase in revenues and profits was driven by the delivery of 3,100 units in 2009, and the increase in income coming from malls and leisure businesses it owns.
“I think what is happening is that Emaar has done well because it didn’t need support like Aldar and Sorouh did, it had the financing already,” said Masud. He also added that Emaar was able to differentiate itself from the rest of the pack because other companies do not have a portfolio as mature as Emaar’s, in terms of reoccurring income and international projects. “To what extent it can continue to do that will be a question mark,” he added.
As for the first quarter numbers, Chowdhury from Almal Capital said that Emaar’s financials should be strong with the delivery of Burj Khalifa, but will not maintain a robust growth in the second or third quarter since there will not be as many deliveries to be made.
“Emaar looks better for the simple reason that it sold most of the things that it was going to sell,” he said. “Aldar is still building most of the things that it is going to sell and while it is building them, [their prices] are falling.”
Aldar also had some surprising results. Shafqat Malik, chief financial officer told Bloomberg in mid-February that the company had suffered, for the first time, a net loss of $153 million in the fourth quarter of last year, compared to a profit of $23 million in the same period of 2008. In a Bloomberg survey, analysts expected the company to record a profit of $111 million and a Credit Suisse estimate stood at $23 million. Aldar’s annual profit fell 71 percent year-on-year to $272 million, and revenues fell 60 percent to $539 million. Malik also told Gulf News that the decline was due to the absence of any land sales throughout the year, adding that there “were project write-offs of around $141 million in the fourth quarter alone, with the pre-opening costs of $46 million in our different Yas Island assets.”
The drop came as somewhat of a shock due to the relatively strong Abu Dhabi market in which it is based.
“Aldar couldn’t exceed expectations because people expected it could do some land sales, because the Abu Dhabi market was comparatively better than Dubai’s,” said Venkateshwaran Ramadoss, senior research analyst at real estate department of the Kuwaiti Financial Center (Markaz).
Moreover, Chowdhury explained that Aldar is earlier in its lifecycle than Emaar and thus has a less developed business model.
“Aldar it is still at least another year or two away [from maturity],” he said. “So the crisis has caught Aldar too early in its life cycle, leaving its revenue and its income stream more volatile to the crash, compared to Emaar.”
After announcing its financial results, Aldar also announced the sales of the Yas racetrack, the yacht club, as well as the infrastructure on Yas Island to the Abu Dhabi government for $2.5 billion. The sale was at book value and no profit was recorded. Credit Suisse reported that this sale would reduce the net debt-to-equity ratio from 115 percent to 71 percent.
“The sale of the track and certain associated amenities in itself is a positive step,” said EFG Hermes in a note. “As it would mean that some concerns over Aldar’s capital-intensive ventures are now eased.” In the first week of March, Moody’s downgraded Aldar’s rating to Ba1 from Baa2, the first step below investment grade with a negative outlook, along with six other government related UAE companies. Following the announcement, Abu Dhabi government reaffirmed in a press release its support for its state-owned entities and said “we obviously disagree with the reasoning involved in a number of Moody’s decisions.” Aldar was not available to comment.
Sorouh too young to fall
Sorouh Real Estate fared better than Aldar in the last quarter, and revenues were $119 million, 17 percent lower than the same period of 2008. The revenue was mainly driven by the sale of 643,000 square meters of land for developing the first phase of the Al Ghadeer project, built by Al Sdeirah Real Estate Investment, which is 30 percent owned by Sorouh. The company recognized $66 million in provisions in the last quarter as well as a $13 million loss from its 20 percent share in three associates: Aseel Finance, Green Emirates Properties, and Al Maabar International Investment LLC. The company’s net profit amounted to $7 million; down from $13 million in the same period of 2008.
“In 2009, we saw very few sales of property units, as we had not launched any new projects and had already pre-sold a number of units heading into construction phase,” said the company in an emailed statement.
Over the course of the year, the company managed to cut expenses by 41 percent to $63 million, recording $844 million in revenues and $135 million in net profit — 16 percent and 73 percent lower, respectively, than in 2008. Al Mal Capital’s Chowdhury said that Sorouh was further behind in its life cycle than Aldar, which has placed it in a better financial position and protected it from a substantial debt burden on its balance sheet.