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UAE: Abu Dhabi property market to turn attractive

Tuesday, 15 December 2009 23:04

“Liquidity concerns which triggered recent sell off unjustified, particularly in the case of Abu Dhabi given the strong fundamentals and government backing. The sector fundamentals in Abu Dhabi remain solid with exceptionally high rental yields (c10%) and an acute shortage in all segments, expected to persist until 2013. Also, the Abu Dhabi government is well placed to provide support given its large reserves estimated at USD800bn. HC Brokerage sees current valuations as bargain buying opportunities.” said a research report on Abu Dhabi real estate-2009 by HC Brokerage.

Nakheel restructuring bound to lead to further project delays and cancellations, which is supportive of sector dynamics in both Dubai and AD. Given their proximity, the two property markets are highly correlated, with excess demand in AD being absorbed by vacancies in Dubai. The spillover has weighed down on prices in AD forcing developers to delay/consolidate projects and offer discounts, which raised questions about the viability of its future projects. Since Nakheel controls c50% of forthcoming supply in Dubai, HC Brokerage feels that its restructuring is likely to be supportive of pricing in both emirates going forward.

HC Brokerage’s preferred play is Aldar, largely on valuation (trading at 0.75x 2009e BV and 0.3x NAV versus Sorouh at 1.0x 2009e BV and 0.45x NAV), despite high gearing. Although the Dubai debt situation has renewed global liquidity concerns, given Aldar's strong government ties, HC Brokerage believes that its strategy of maintaining price levels by gearing up its balance sheet is likely to prove value accretive. Conversely, Sorouh's sales-based strategy helped maintain its strong liquidity position, but at the cost of significant price appreciation, and resulted in rapid depletion of its most prime land bank, with little buildup of investment assets.Also, its decision to consolidate projects and offer discounts is likely to protect itscash flows, but is likely to lead to margin compression going forward.

HC Brokerage initiates on Aldar and Sorouh with a Buy recommendation and TPs of AED6.2 and AED3.2 per share. HC Brokerage values real estate companies using a combination of DCF and land valuation. Where a final master plan is available, HC Brokerage uses a DCF; otherwise, HC Brokerage uses land valuation only. To be conservative, at this stage HC Brokerage excludes future projects from its model until further clarity. For Aldar, HC Brokerage excludes Al Raha Beach phase 2, Yas Island phase 2 and Motor World, whereas for Sorouh, HC Brokerage excludes Lulu Island and Sheih Al Sedira. HC Brokerage values Aldar and Sorouh at a 56% and 42% discount to their 2009e NAV of AED14.2 and AED5.5 per share.

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