Strategy Note /
United Arab Emirates

Dubai dichotomy: completed real estate vs Emaar off-plan

    Hasnain Malik
    Hasnain Malik

    Strategy & Head of Equity Research

    Tellimer Research
    2 January 2020
    Published byTellimer Research

    Dubai's completed real estate remains in the doldrums, falling c10% on average across all segments in 2019 (the residential segment is now c30% down from the 2014 peak, but still c30% above the 2010-11 trough). The only silver lining is that in the residential and retail segments, the rate of decline appears to be moderating (the same cannot be said for hotels and office space, where encroachment from the asset-sharing model may be at play).

    This is despite the passage of about a year since a raft of reforms on visas (10-year for highly qualified professionals, 5-year for retirees, visa on arrival for short-stay tourists) and business licences (dual on and offshore licences, 100% ownership of onshore companies), and despite the much-hyped Expo 2020 being merely ten months away. 

    In contrast, the off-plan sales bookings of the largest developer, Emaar Properties, which accounts for c70% of total off-plan launches, were up 25% yoy in 9M 2019 in value terms (although Q1 was almost double the contribution of each of the subsequent quarters).

    The dichotomy between Emaar's off-plan sales and all other segments of the market is consistent with our view of Dubai's overall dichotomy between the "uber-rich" and most other segments of expatriate society (whether investors, tourists or residents). This is a theme we have explored previously – Dubai: The VIP Room, March 2017.

    Dubai equities, measured by the DFM General Index, are up 14% in total return terms since the start of 2019, but its largest real estate stock, Emaar Properties, is up merely 1%, and Emaar's UAE-focused development subsidiary is down 5%. Emaar Properties is at a 50% discount to the 5-year median trailing price/book (0.6x versus 1.1x) and price/earnings (4.6x versus 9.5x).

    Overall, we expect completed real estate price deflation to continue. Below we summarise the potential drivers of a broader pick-up in Dubai real estate (i.e. non-Emaar off-plan and the entire completed sector). 

    The charts below illustrate pricing in the completed sector, Emaar off-plan sales, planned new supply additions, historic valuation of DFMGI, Emaar and Damac, and Dubai 2029 Sukuk, while in the table below we present a top-down screen of UAE stocks for liquidity, performance and valuation.

    (The data in the charts and tables above is sourced from REIDIN and JLL).

    The potential drivers of a broad real-estate recovery in Dubai

    A broader-based real estate pick-up, on the demand side, in our view, requires a combination of the following potential factors: 

    • Dubai-specific – Much more accessible long-term residency visas (the evidence of the post-financial crisis policy environment of 2009 suggests that once there is recognition of a problem among policy-makers, increasingly bolder responses are adopted).
    • Dubai-specific – Liberalisation of gambling laws, i.e. licensed casino operations (although there are hotel developments underway from the likes of MGM Resorts and Caesars Entertainment, there is no provision for casinos and publicly reported statements from local authorities and these operators have ruled this out).
    • UAE-specific – More concerted delineation of non-oil diversification activities, i.e. the removal of duplication, across Dubai and Abu Dhabi (post-financial crisis, much consolidation has occurred to remove duplication within each emirate, but relatively little across both).
    • Regional – Broader geopolitical de-escalation, for example in relations with Qatar and Iran (thus far there appears to some re-opening of a dialogue between Saudi and Qatar, less so the UAE and Qatar, and between the UAE and Iran, less so between Saudi, or the US and Israel, and Iran).
    • Global – Acceleration in global growth and the resultant transit of sea-trade via Jebel Ali and air travellers via Dubai's airports (global GDP growth forecasts still appear to be under downward pressure).

    A reduction in real estate transfer fees (not currently under consideration) would likely not prove sufficient (the drop in registration fees in neighbouring Abu Dhabi failed to arrest the decline of completed real estate prices in that market in 2019).

    On the supply-side, the committee formed by the government in 2019 to consider over-supply in the real estate market is unlikely to prove sufficient, given that Emaar already dominates off-plan supply and, as long as its off-plan sales are buoyant and its off-plan cash collection is on track, it is unlikely to meaningfully alter the pace of new additions.

    (The data in the charts and tables above is sourced from Bloomberg).