The next twist in the GCC property and credit cycle

The next twist in  the GCC property and credit cycle

Emaar's offering is not outrageously priced, offers compelling value for end users and has the backing of the region's preeminent master developer, where the Dubai government has a one-third stake.



By Matein Khalid

Published: Sun 28 Feb 2016, 11:00 PM

Last updated: Tue 1 Mar 2016, 8:09 AM

Six data points last week reinforce my conviction that the GCC's property/credit market stress will only accelerate in 2016. One, Standard and Poor's downgraded Saudi Arabia's sovereign credit rating to A- while Bahrain and Oman are now both below investment grade. The new sovereign credit downgrade cycle in the GCC comes at a time when sukuk/debt new issuance volumes have plummeted by 50 per cent, the regional IPO market is frozen, bank shares have fallen 40-60 per cent from peaks and borrowing costs in the local money market are double those in the London interbank market.
Two, HSBC slashed its price targets on Emaar and Damac Properties as its property analyst estimates a 20 per cent fall in sales at both Emaar and Damac. My take? Emaar's offering is not outrageously priced, offers compelling value for end users and has the backing of the region's preeminent master developer, where the Dubai government has a one-third stake. The balance of risk has moved from buyers to developers as even a 15 per cent price fall does not ignite sales in a glutted, overpriced market where property finance is credit rationed and loan pricing spreads have doubled.
Three, Emaar Mall, owners of the ritziest, the largest mall in the Milky Way, reported weak earnings on lower sales growth. Friends who own luxury retail businesses in the GCC report a 20-30 per cent fall in retail sales.
Four, it is only a matter of time before banks cut credit line, to smaller developers who cannot match the incentives of their largest "too big to fail" peers. There is unquestionably huge potential value destruction in the Gaga Golf Goofy Wonderland segment of the luxury villa market. Buyers of luxury villas may be born at night but they were not born last night!
Five, Asteco data on new supply just horrified me. Asteco calculated 14,300 home deliveries in Dubai in 2015 and 29,700 deliveries in 2016. Asteco sees one million square feet of new office space in 2016 after 500,000 square feet in 2015. This is happening at a time when the office vacancy rate is 40 per cent and the slump in world trade/loss of bank credit lines has gutted the corporate SME sector.
Six, the RERA service charge index shows vast differences in service charges that property owners in Dubai are being asked to pay. A spiral in property service charges by cash flow constrained master developers does not inspire or ignite end user demand in a glutted market. After all, master developers have not exactly been subtle in forcing homeowners to pay higher service charges, as urban horror stories about developers cutting off air-conditioning, draining swimming pools, cutting off beachfront/gym access attest. After all, service charges in some communities rose 30 per cent in the past year.
2016 will witness seismic changes in property finance, developer cash flows and homeowner/investor psychology in the UAE. The macro adjustment process has already begun. Emaar's offer of a 40 per cent payment on handover in the Sidra villas is a glimpse of the future. Aldar Properties plans to cut its $3.8 billion corporate debt by more than half as it tries to maximise synergies with Sorouh yet will still be on track to deliver 7,000 units later this year. The time of go go leverage, speculative buying sprees, manic development and hard sell marketing to lure offshore high rollers will all be victim of the 2015-16 property slump. The new normal will focus on end user comfort, stable bank financing, affordability and value, not price. Yet with master developers facing multi-billion dollar refinancing needs in the next twelve months, be alert to the rustle of tail risks and black swans. After all, I will never forget Lehman and the autumn of 2008 for the rest of my life and its traumatic aftermath, when property prices plunged 60-70 per cent the Gulf's worst property crash.
Property value presupposes access to stable credit from banking systems, corporate debt and government agencies. This is no longer the case in 2106. Bank deposits in the UAE fell 16.7 per cent in 2015 due to a plunge in government petrocurrency flows related to the oil crash. This is the reason the three-month EIBOR rose from 0.6 per cent to 1.025 per cent in 2015 and led to a fall in property values.
Europe's systemic banking crisis and the colossal losses in UK banks HSBC, Stan Chart, Barclays and RBS threaten a significant source of cross-border bank finance to the Gulf. Global liquidity shocks will take their toll on GCC property values.
Researched and compiled by Matein Khalid. Mr Khalid is a global equities strategist and fund manager. He can be contacted at matein@emirates.net.ae


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