Upswing in investor interest predicted for Dubai real estate bonds
Dubai real estate developers may issue bonds to fund a growing pipeline of new projects — and market movements suggest they would attract strong investor demand.
In the past, most property and construction firms in the emirate relied almost exclusively on bank finance. Although local banks are flush with cash, that strategy may not work as the next building cycle begins.
The partial pull-out of European banks from the region has reduced the number of lenders, while many banks want to diversify their exposure since the crisis. The UAE Central Bank is drafting rules to limit banks’ exposure to state-linked entities, and the state holds large stakes in most of Dubai’s big real estate developers.
So the bond market is set to play a bigger role in the real estate sector in coming years, giving regional investors access to a wider range of credits after they were forced to focus largely on bank debt in the last several years.
“Property firms like Nakheel have already borrowed from local and international banks, and lenders may not be willing or allowed to lend any further to these companies and increase their exposure,” said Ambereen Jiwani, senior analyst at Securities & Investment Co in Bahrain. “From an investor’s point of view, debt instruments by government-linked property firms will be attractive based on the risk premium offered over sovereign bonds and so I think they will be taken up. The Dubai real estate market has staged a recovery and investor confidence has improved.”
A big question mark over the slew of real estate projects announced in Dubai over the last nine months has been their financing; even if only a fraction of the plans go ahead, they will require tens of billions of dollars.
Last month, Emaar Properties said it would form a venture with Dubai Holding to build Dubai Creek Harbor, a 6.5 million sqm district including business, shopping, sporting and entertainment facilities. Separately, Emaar said it formed a venture with Meraas Holding to build a residential and commercial area near the city’s downtown area.
The Meydan Group and the Sobha Group have announced plans to develop a leisure, retail and residential complex, while Meraas hopes to complete the first part of a $2.7 billion complex of five theme parks by the end of 2014.
There are already signs that some companies are thinking of the bond market. Dubai construction firm Arabtec, which this month completed a $653 million equity rights issue, has said it might raise as much as $450 million from the bond market at the end of 2013 or in 2014. That would be its first bond issue. Dubai Investments, which has interests in property and manufacturing, has hired banks for a $300 million Islamic bond sale, but has not issued yet.
The Gulf’s bond market has deepened and become more liquid than it was during Dubai’s last real estate boom in the middle of last decade; foreign investors are more familiar with it. This makes the use of bonds by real estate firms more feasible.
The dramatic recovery of investor confidence in Dubai since being affected by the recent global financial crisis also helps. After plunging more than 50 per cent in the wake of the crisis, residential property prices in Dubai are on average up by around 16 per cent year-on-year, analysts estimate.
Also, Dubai’s real estate developers have been forced to reorganise and diversify themselves over the past few years in order to survive. The benefits of this may still be emerging. For example, Emaar has moved to capitalise on Dubai’s tourism boom by developing a hotels and malls business.
Early this month, JPMorgan Chase & Co analyst Zafar Nazim upgraded Emaar’s $500 million Islamic bond maturing in 2019 to “overweight”, citing the company’s recurring revenues from hotels and malls and a strong cash balance, last reported at $1.3 billion.
He recommended the real estate sector as offering the most value among Dubai corporate credits.
“We are constructive on all real estate-related credits in Dubai — each for idiosyncratic reasons not necessarily related to the city-state’s recovering real estate market,” he wrote.
The recent performance of the few outstanding bonds issued by Dubai real estate developers suggests the market would absorb more supply. The bonds have held up well during volatility in global markets caused by the threat of rising US interest rates.
The yield on Emaar’s 2019 bond, rated BB+ by S&P, has risen about 100 basis points since May 15 to around five per cent.
That has far outperformed most similarly-rated emerging market corporate credits in other parts of the world; the yield on a $500 million bond maturing in 2020 issued by Turkish glass manufacturer Sisecam, also rated BB+, has jumped from 4.25 per cent at issue in early May to 6.60 per cent.
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