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Moody’s upgrade, profit drives Emaar

Emaar Properties PJSC’s Islamic bond yields are poised to extend declines after falling to record lows the past two days, fuelled by credit upgrades, a 21 per cent jump in profit and Dubai’s real-estate recovery.

“There’s still a bid for Emaar, people are still adding it to their portfolios,” Aliasgar Tambawala, the Dubai-based manager of fixed income at Mashreq Capital DIFC Ltd, which oversees about $700 million in assets, said by phone on Tuesday. “As investors can’t find enough of it, the price will have to go up more.”

The yield on Emaar’s $500 million notes due July 2019 fell 64 basis points this month to a record 4.01 per cent at 12:10 pm in Dubai, according to data compiled by Bloomberg. The price rose to 111.81 of face value from 108.67 in the period. The average yield for Middle East sukuk as measured by JPMorgan Chase & Co. indexes fell 5 basis points to 4.86 per cent this month.

Emaar, whose 2013 profit climbed to Dh2.57 billion ($700 million) from Dh2.12 billion a year earlier, is a “clear beneficiary” of Dubai’s real estate recovery, Moody’s said as it raised the company two levels to the highest non-investment grade. Standard & Poor’s on February 5 gave the developer of the world’s tallest tower an investment grade for the first time in four years, citing its improved risk profile.

Rating boost

Real estate companies in Dubai are benefiting from an economic recovery and a rebound in construction as the Gulf business hub prepares to host the World Expo in 2020 with $8 billion of infrastructure spending.

Emaar plans Spanish-style villas, a leisure and shopping development near Dubai’s new airport and apartments close to the world’s tallest skyscraper.

Home prices may jump as much as 40 per cent this year, according to the emirate’s Land Department.

The yield on the 2019 notes fell the most in four months February 5 after the upgrade to BBB- from BB+ at S&P. Emaar lost its investment-grade rating in December 2009 as Dubai property prices dropped during the global credit crisis. Moody’s raised the company to Ba1 from Ba3.

“Emaar 2019s performed well on the back of initial rating upgrade,” Ali Soner Guney, a fixed-income fund manager at National Bank of Abu Dhabi PJSC, said by phone. “The bonds may now show little reaction to the second rating upgrade and positive earnings, but it is normal to experience digestive periods following such strong price performance.”

The 2019 notes tumbled last year after the US Federal Reserve raised the prospect of a reduction in its bond-buying programme. The yield climbed to 6.1 per cent June 26, compared with 4.94 per cent for Middle East sukuk on average, according to JPMorgan indexes.

“The downside is limited, but if the entire market widens then these bonds will widen too,” Tambawala said.

Emaar’s Indian venture in June received notice of a Rs86 billion ($1.38 billion) fine for violating foreign-exchange rules. The company is still pushing ahead with expansion, and announced a $3 billion project in Erbil, Iraq in October. It also has ventures in countries including Egypt, Saudi Arabia and Turkey.

Shares of Emaar have gained 14 per cent this year, after more than doubling in 2013, as real-estate prices in its Dubai base surge. Mid-range apartment prices in Dubai climbed 43 per cent last year, according to Cluttons LLC data on Bloomberg.

“The sukuk still has upside and is a good investment for buy-to-hold purposes,” NBAD’s Guney said.

“You can capitalize on four per cent-a-year return without worrying at all about repayment capability.”