Since July 2008, stock prices of real estate companies have plunged continuously. This is especially true in the UAE where investors fled the stock market due to bad expectations, the need for liquidity to cover losses in foreign markets, or because they were simply following the crowd. Yazan Abdeen, portfolio manager equities at ING Investment Management thinks “markets are smart in their nature. They have the ability to discount future expectations and the fears of investors.” In this case, investors began to expect the burst of a real estate bubble that would result in a plunge in property prices and lower valuations for real estate companies. “Regardless of the size of the company, I think that the market was taking into consideration some trends of action will take place that will yield in the deleveraging that has happened to these companies,” says Abdeen.
At first, investors started to sell their real estate stocks irrespective of the company’s fundamentals, relying solely on the sector’s outlook and the overall macroeconomic situation. However, since concerns started to emerge about the financial status of these companies due to tighter liquidity and expectations of weaker earnings results, doubts about their fundamentals have grown. “Progressively, it would appear that people began to question the fundamentals and the overall features of some of the [real estate] companies in tighter liquidity conditions,” explains Sana Kapadia, vice president of equity research at EFG-Hermes. “What started as a more technical sell off [seems] to have become a questioning of long-term sustainability,” she adds.
Emaar’s stock price
Emaar properties’ stocks for last half year
Emaar properties, the largest property developer in the region hit its lowest share value of $0.48 on February 3 and as Executive went to print, stood at $0.75 after the Dubai government launched a $20 billion sovereign bond program to ease liquidity conditions. At the same time, other real estate companies in Dubai, like Union Properties and Deyaar, stood at $0.23 and $0.15, respectively. Even though these companies have witnessed a small increase in their stock prices, likely due to the $20 billion bond program, it is still too soon to tell if this indicates a trend toward market recovery
Since the beginning of the crisis, Emaar stocks have been the most affected in the sector as they have lost more than 80 percent of their value in 2008 and around 37 percent in the last three months. Thomas Schellen, publishing editor at Zawya Dow Jones, explains that even though Emaar’s stock price has suffered the greatest loss, that does not necessarily indicate that it has worse market fundamentals than other companies in the UAE or the region. In Schellen’s view, Dubai was the worst hit by the crisis because the relative importance of its the real estate sector in the economy is higher than in other GCC countries. Consequently, Emaar, being the biggest company on Dubai’s financial market and with a high trading activity, was affected the most. Kapadia also believes that the impact on Dubai’s stock market is more significant since “a distinction continues to be made between Dubai and Abu Dhabi, with more risk being perceived in Dubai companies in the property market… the property market crash [is] expected to be much worse in Dubai than Abu Dhabi.”
Emaar’s financial situation
On February 12, Emaar released the long awaited 2008 fourth quarter report announcing a 54 percent decrease in net profit, mainly blamed on the $480 million write-down in its US subsidiary John Laing Homes, which weighed down the company’s net profit. Emaar recorded a net operating profit of $1.519 billion in 2008, 15 percent lower than its net profit of $1.79 billion in 2007. It also announced that its revenue dropped by 10 percent, from $4.865 billion in 2007 to $4.360 billion in 2008. A week after the report was released, Emaar announced that it will not be paying a dividend in 2008.
Additionally, it seems that liquidity problems at Emaar are starting to emerge since the company revealed in January its plan to secure financing by raising up to $4 billion through Eurobonds and Islamic sukuk. It has announced the establishment of a $2 billion Euro Medium Term Note (EMTN) program and a simultaneous sharia-compliant $2 billion sukuk program, already listed on the London Stock Exchange. These programs are issued “as a part of the company’s global growth strategy,” said Emaar in a statement.
U.A.E. Property prices have fallen 40 percent and are expected to drop 20 percent more in 2009
Emaar’s possible downgrading
In mid-December 2008, Standard and Poor’s (S&P) rating service revised its outlook for the company from stable to negative, while keeping its ‘A-’ long-term corporate credit ratings. “A prolonged downturn could negatively impact our view of Emaar’s business risk, and it could also lead to deterioration of Emaar’s currently healthy financial position,” said S&P’s credit analyst Alf Stenqivist in a recent press release. Even though Emaar’s rating is still high, the fact that S&P’s outlook was downgraded is not a positive sign for the company. Moreover, Moody’s Investor Service said at the beginning of February that it is reviewing six leading Dubai companies, including Emaar, for rating downgrades due to Dubai’s macroeconomic outlook. Moody’s anticipates that the downgrade would be lowered by not more than two notches, still leaving these companies with investment grade ratings. Schellen explains, “the outlook forecast might influence negotiations between the debt issuer and the bond buyers. The bond buyers might demand a higher yield because the outlook is negative, but unless the actual rating changes, it is unlikely that there is going to be any change in the direct interest situation.”
Abdeen explains that the share prices of a company do not affect its operations from a financial perspective. “The movement of the share price is neither loss nor gain for the company. The price does not affect its performance,” but there is very much a link between the company’s performance and its share price. Therefore, any bad news for Emaar or the market in general might affect the company’s share performance.
Property prices
The fact that property prices are still on a downward trend — especially in Dubai — and that projects are being shelved, is not improving the confidence of investors who would rather stay out until the market starts to show some signs of recovery. Analysts at the UAE investment bank Shuaa Capital said in mid-January that property prices have fallen 40 percent so far and are expected to lose an additional 20 percent by the end of 2009. Collier International’s analysts were more optimistic since their fourth quarter House Price Index (HPI) revealed a drop of only eight percent in Dubai between October and December of last year. “If you come to the market here and see what is happening, [Collier’s numbers] are underestimated. I know that some major places in Dubai, like the Burj Dubai area, have gone back to the price of the third quarter of 2007. It seems they have dropped around 45 percent,” says Abdeen.
Forging into the future
Abdeen believes that any company should now have four key factors in mind to withstand the difficulties in 2009. These four elements are “visibility, profitability, proof of cash flow generation and lack of high leverage — you need these four pillars to stand, and if you have them, you will be immune,” he adds.
Kapadia believes “this is the time for companies to have strong corporate governance and corporate communication.” Everyone knows these are difficult times and companies are struggling to deal with changing market dynamics. Therefore, “if a company communicates and discusses how it is dealing with the current market challenges, it would help people believe that management is focused on dealing with the new dynamics,” she explains.
With the current chaos in the UAE real estate market, it seems that Emaar and others have a lot to do to revive investor’s confidence in their company, as well as the market in general. People are starting to suspect that Emaar is currently facing much more trouble than expected and they would rather stay out of the stock, even if it is priced at half a dollar. “I think there is high risk-averseness and a general desire not to spend on any kind of investment right now. Even if the stock may look cheap on P/E [price to earning ratio] basis, the earning is in question, given limited visibility regarding how the current cycle will play out,” explains Kapadia. “It has become challenging for companies to maintain the sustainability of their earnings.”
It certainly seems people are not expecting any improvements in the short run, however, with the fast changing market conditions and the complexity of the market mechanism, experts agree that the stock markets are very volatile and only a wait-and-see strategy should be adopted at this time. “Right now it would be pretty stupid for an analyst to claim that he or she knows what is going to happen in 2009 and what the scenario is most likely to look like,” concludes Schellen.
“Visibility, profitability, proof of cash flow generation and lack of high leverage — you need these four pillars to stand”
