Emaar under investor scrutiny

Emaar, the country's largest listed developer, is coming under the microscope of investment banks after a year in which its share price has collapsed by 80 per cent. Some investors believe developers offer good value at current prices because of fundamental support from high demand for property as a result of a rapidly expanding population. Others expect large falls in property prices to come as part of an extended global liquidity crunch, leaving developers with unsold buildings and falling profits.

Emaar closed at Dh2.98 on Monday, when the Dubai Financial Market closed for an extended Eid al Adha holiday, a marked reduction from its 2008 peak of Dh15.2 in January, and its all-time high of Dh28.7 in September 2005. In its latest report, Merrill Lynch rated the developer "neutral" and forecast its 2008 profit to fall 8.8 per cent year-on-year to Dh6bn. According to the bank, profits will then fall by 70 per cent in 2009 to Dh 1.8bn and by another 83 per cent in 2010 to Dh300m.

"We do not ascribe any value to the land above book value and put the shares at about 0.5 times book, a level that has been experienced in down cycles by property developers elsewhere in the world," the bank said. Merrill said Emaar "still has sizeable outstanding capital commitments, may face some of its buyers defaulting and a profit warning is perhaps possible". Over the past five years the opening up of the property market to foreigners, especially in Dubai, saw an explosion of growth.

During the summer, however, liquidity dried up. Banks have curbed lending, developers have found it hard to sell the properties they have on their books, and prices have even begun to fall. Emaar recently unveiled two plans to help revive flagging demand for housing. The first allows home buyers a five-year loan to pay instalments on off-plan purchases. The second allows home seekers to put rent towards a downpayment.

Shuaa Capital, in a report released last month, expected Emaar to be hit by price falls of up to 20 per cent in some areas. "Over the next six to 12 months, we expect this emerging reality together with the declining mortgage availability to suppress Emaar sales volumes on apartments, villas and land plots in the UAE. Meanwhile, the company will continue to receive payments on the majority of sales made to date and recognise revenue on the same sales in line with construction and cash collection progress."

Other analysts are more optimistic about Emaar's prospects, with the likes of Abu Dhabi Commercial Bank backing its long-term prospects, partly because of its huge cash reserves. In a recent ADCB report on Emaar, the bank attributed Emaar a "buy" rating, pinning a fair value at Dh9.84. "Given its strong balance sheet and government support, we believe Emaar is well positioned to weather the current liquidity crisis having reported Dh6.4bn in cash and cash equivalents and low leverage as of Sept 30 2008. In addition, international operations are likely to contribute significantly going forward as the company is reinvesting its profits in high-growth emerging markets including Saudi Arabia, Egypt, Morocco, China, and India," ADCB said.

A Dubai-based trader said that while Emaar was currently trading at a large discount, with a low price-to-book value ratio, he could not identify a catalyst which would see it rebound. Listing its various foreign ventures, he said the main catalyst will have to come from international factors to revive its fortunes. afoxwell@thenational.ae