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A look at the trading patterns of listed UAE real estate developers reveals that most of their stocks have been in recovery mode from early 2013 to 2014. They began to consolidate towards the beginning of 2015 and are almost back at their pre-recovery levels.
This happened in line with the cooling-off period of the UAE real estate market, especially in Dubai, with home price correction in some places reaching double-digit figures and rental yields coming down from 7-8 per cent to more moderate 5-6 per cent.
A mature market
The big difference between this scenario and the recession in 2008-09 is that the market is not moving slower as a result of a property bubble, but simply showing signs of maturity. This is a welcome development after the real estate sector’s oscillation through the period from the Arab Spring in 2011 to the oil price slump since mid-2014.
“We believe that the slowdown in the real estate market is positive in the long run, as it gives it time to absorb the existing supply pipeline while alleviating our concerns about the housing market potentially overheating,” ratings agency Moody’s said in an assessment of the Dubai realty market in March. It also predicted a further 10-15 per cent price correction over 2015, but no repeat of the 2008 situation.
The correction Moody’s expects is a bit higher than the ones predicted by property consultancies JLL (up to 10 per cent) and Knight Frank (5-10 per cent).
“A less volatile market is beneficial for all stakeholders and will help developers plan their future pipelines in line with real demand,” the Moody’s report said.
What’s fuelling the stock?
Turning attention to property stocks is also triggered by a number of other factors, namely the cyclical nature of the property market. From past developments it can be seen that each boom-and-bust phase in the UAE lasted for about three to four years, which technically means that the property market reached its peak in 2013 should bottom out in 2016.
From then on, two factors are expected to boost the market up to 2020, particularly for listed developers and construction firms. The first is the run-up period to the World Expo 2020 — to be held for six months from October 20 to April 10, 2021 — which is expected to create additional demand. Dubai forecasts welcoming 25 million visitors annually by 2020 and will spend around $6 billion (Dh22.03 billion) on infrastructure and related projects, creating an estimated 277,000 jobs for people who will have to stay somewhere.
The second factor — and this is where the government comes in — is the push for developers to start constructing more affordable housing complexes. Several project launches in the recent past have triggered more interest in middle-income housing, driving the construction and real estate development businesses.
“The renewed focus on Dubai’s pent-up demand for affordable housing is spurring local government, investor and developer activity,” says John Stevens, Managing Director of property firm Asteco.
“Value for money has become more important than property prestige.”
Dollar helps the dirham
Among the listed developers who are taking on the affordable housing segment are Emaar and Damac Properties, both stocks worth some consideration.
“The introduction of this [affordable housing] asset class in Dubai is likely to bring a surge in institutional investor interest,” says Steve Morgan, CEO of property firm Cluttons Middle East.
Another factor that allows for gains when buying into UAE property stocks is the anticipated strengthening of the US dollar, to which the dirham is pegged. Come the gradual rise of interest rates in the US by the last quarter of 2015, the dollar is forecast to rise especially against the euro and pound.
Citibank, in its June 15 Financial Market Analysis, expects the euro to drop against the dollar to parity by March 2016 from current levels, which has the potential to result in a currency-based appreciation of UAE stock of around 12 per cent, bought by converting euros into dirhams.
So what are the best UAE property stocks to buy? An important factor is trading volume, as the lack thereof, at times, can be a hampering factor for investors on the country’s exchanges. This analysis looks mainly at high-volume stocks, namely Arabtec, Union Properties, Emaar, Damac, Deyaar, Aldar, RAK Properties and two others with lower volume but good potential, namely Drake & Skull and Manazel Real Estate.
Other listed property firms, builders or construction material suppliers such as the many listed cement companies in the UAE have too little trading activity to make them attractive.
Attractive dividend yields as a result of share prices that retreated since early 2014 can be a decisive criterion when buying property stocks. The current dividend aristocrat among UAE property stocks is RAK Properties with around 7.5 per cent yield as per June. The stock fell 33 per cent in one year but seems to bottom out now.
Another good dividend payer is Aldar with a current yield of about 3.6 per cent after the Abu Dhabi listed developer’s stock price dropped 26 per cent over the past 12 months.
Emaar is recovering from a 36 per cent drop over the past six months and building up momentum again. Its dividend yield is a meagre 1.85 per cent, but the company is also known to hand out bonus shares when good earnings merit.
Another property blue-chip at the Dubai Financial Market, Union Properties, which is known for developments such as the Green Community, is currently offering a dividend yield of 2.2 per cent.
Among the non-dividend paying property stocks to consider are Damac due to its low price to earnings ratio, as well as Deyaar and Arabtec due to their promising technicals. Far less attractive patterns can be detected in stocks of Drake & Scull and Manazel Real Estate, the Abu Dhabi-listed developer of projects such as Al Reef, Prestige Towers and 9712 Abu Dhabi.
For medium- to long-term investors, UAE property stocks are certainly a good consideration. However, while they are clearly in a bottoming out phase, there is still considerable volatility which smart investors should make the most of by buying selectively in bits and pieces when prices are low to keep the dividend yield high.
For this reason, low-volume shares should be avoided. Keeping an eye on oil prices and currency rates, if applicable, is also essential in order to have a successful investment.
Source: Arno Maierbrugger, Special to Property Weekly