Property Beat report by HC Securities & Investments

Published March 22nd, 2010 - 09:58 GMT
Initial signs of rental stabilization/recovery (+1% in December 2009 and
January 2010, +6% in February 2010) suggest the market is reaching
equilibrium. After nine months of declines, asking rentals in Dubai stabilized in
November 2009 and recoded strong gains in February 2010, up 6% MoM. Rental
yields expanded to 6.5%, the highest in almost a year.
Government figures show a 6% population growth in Dubai until 9M09.
While we are cautious about the methodology followed, the figures are supported
by industry demand numbers. DEWA reported a 14% YoY growth in the number of
power connections in 2009, whereas du recorded a 40% YoY growth in mobile
subscribers and a 17% YoY growth in fixed-line subscribers in 2009. Etisalat also
recorded a 6% YoY growth in mobile subscribers, but saw a 4% YoY decline in fixed
lines, in line with global trends.
Agreed prices up 6% in February 2010 (2% MTD) after a 13% drop
following the Dubai standstill announcement in November 2009. While we
initially thought deliveries were main contributors to strong gains, our survey
suggests that areas which witnessed the most handovers actually saw declines in
February 2010 (Downtown Burj area -5%, Dubai Marina -10%). We believe this can
be explained by distressed seller offloading properties ahead of the last bullet
payment, which is typically the largest.
Price gains driven by cash buyers in lower-income developments (smaller
units/apartments). Mortgages continued to tighten ahead of the Dubai World
debt restructuring proposal. Our data show that mortgage values dropped further
to 15% of total transactions in February 2010, from 21% in November 2009 and
32% in September 2009. Mortgage volumes fell to 11% in February from 25% in
September. Cash buyers seem to be picking up smaller, more affordable units
(International City +9%, Greens +11%, Jabel Ali +10% MoM) with higher yields for
investment purposes (IC rental yields 10% versus 3% average deposit rate).
Abu Dhabi asking prices up 3% in January 2010 and 9% in February 2010
ahead of major deliveries this year. As major developments are approaching
completion (specifically on Al Reem Island and Al Raha Beach), it seems the market
is starting to rerate factoring in rental yields in excess of 8%. Current average prices
stand at cAED15,000/sqm, 25% above the original selling price of cAED12,000/sqm,
hence limiting default risk. That said, we remain cautious as prices may show
weakness upon delivery, as they did in Dubai, as investors try to avoid the last
installment.
Aldar (Buy, TP AED9.7/share, 139% potential upside) is our preferred
play on the sector. With a potential favorable resolution of the Dubai debt issue,
the macro overhang is likely to be lifted, allowing investors to focus on bottom-up
fundamentals. In that scenario, we believe Aldar is likely to outperform as we feel
the AED9.1 billion asset sale has not been fully discounted by the market. The cash
injection will provide the company with much-needed liquidity over the mediumterm
and improve its liquidity profile. After receiving the payment, we estimate that
Aldar’s net debt/equity ratio would drop from 115% to 72%. Aldar currently trades
at 0.3x 2010e NAV and 1.0x 2010e BV (ex. revaluation).

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