Dubai property developers set to be cash-flow positive in 2023 for fourth consecutive year

Dubai's property developers are set to record positive cash flow in 2023 for the fourth consecutive year on the back of healthy pre-sales and favourable payment terms, despite global macroeconomic headwinds, a report has shown.

Real estate developers in the emirate will benefit from residual cash collections of about 20 per cent to 30 per cent of the total on handover, rather than the post-handover payment plans that were more prevalent a few years ago, according to the property market report by S&P Global Ratings.

"We expect continued deleveraging and improving rating headroom for Dubai-based real estate companies in 2023," Tatjana Lescova, associate director of GCC corporates at the ratings agency, said.

"We also expect ample liquidity and limited funding needs. Plentiful cash flow leaves headroom for higher capital expenditure, dividends or acquisitions."

Dubai's property market made a strong recovery from the coronavirus pandemic as the emirate's economy rebounded on higher oil prices and government policies, including changes to visa rules to attract more investment.

Last year, the value of property deals in the market reached a new high of Dh528 billion, up 76.5 per cent annually, while the number of transactions, at 122,658, rose 44.7 per cent annually.

Dubai's real estate market remains resilient despite mounting global macroeconomic pressures including rising interest rates, inflation and the devaluation of emerging market currencies, S&P Global Ratings said in the March report.

The emirate's economy expanded by 4.6 per cent on an annual basis in the first nine months of 2022, with wholesale and retail trade accounting for 24.1 per cent of its gross domestic product, according to data from the its statistics centre.

Emirates NBD estimates Dubai's full-year 2022 growth at 5 per cent and expects the emirate’s GDP to grow by 3.5 per cent in 2023.

Average inflation in the emirate of about 3 per cent is forecast for 2023, below the 5.7 per cent in the Eurozone and 4.3 per cent in the US, putting less pressure on consumer spending, S&P Global Ratings said.

Population growth of 3 to 4 per cent ― supported by government initiatives and Dubai's attractiveness as a place to live and do business ― will buoy the real estate market.

Higher oil prices will help boost consumer sentiment, spending and real estate transactions. The dirham's peg to the dollar provides currency stability and an attractive hedging option for buyers and investors from emerging markets, S&P said.

The outlook for rated Dubai-based real estate companies is "stable", reflecting the expectation that growth will support strong cash flow, steady profitability and improving credit metrics, it said.

Dubai restate developers' revenue growth will mainly come from new and recent sales, according to the ratings agency.

Developers have "good revenue visibility" for the next two years, thanks to their robust revenue backlogs following strong presales in 2021 and 2022, it said.

S&P expects developers' profitability to improve in 2023, despite rising costs.

"We estimate that price increases for new projects in Dubai by far outpace construction cost inflation, as evident from improved gross margins," Ms Lescova said.

"We expect margins to remain strong in 2023, as raw material pressures have subsided, and the price environment is supportive."

Meanwhile, real estate mall operators are recording high margins that can accommodate moderate cost rises, she added.

While Dubai's sectors of residential, retail, commercial and hospitality real estate are "overall resilient", hospitality will find ongoing support from the recovery in tourism, but "new additions will sustain oversupply and limit expansion of average daily rates," Ms Lescova said.

Dubai hosted 14.4 million international visitors in 2022, up from the prior year but still 14 per cent below pre-pandemic levels.

The emirate's economy expanded by 4.6 per cent on an annual basis in the first nine months of 2022, with wholesale and retail trade accounting for 24.1 per cent of its gross domestic product, according to data from the statistics centre.

"We do not expect remote or hybrid work patterns or coworking spaces to disrupt the market, as demand is healthy, but downsizing risk persists," Ms Lescova said.

"Footfall will improve thanks to tourism and population growth. Competition from online retail will mount, but Dubai's extreme heat will maintain the need for indoor commerce as a lifestyle option. Mall operators will enhance their omni-channel presence and offer more entertainment," Ms Lescova said.

Residential properties will continue to record "relatively healthy demand and price stabilisation" as new deliveries should remain high, at about 40,000 units, S&P said.

"Developers' revenue growth will mainly come from new and recent sales. We don’t expect significant changes in mortgage transactions, as interest rates will remain high, but the market is largely cash-based and hence has limited sensitivity to interest rates," Ms Lescova said.

"Dubai remains attractive compared to other major international hubs, as residential prices are still below peak levels, although they are catching up."