United Arab Emirates’ property developers and contractors
may struggle to tap the bond market until a glut of homes that’s weighing on
prices is sold off.

Arabtec Holding, the country’s biggest construction company,
Dubai-based mall-developer Majid Al Futtaim Group and Abu Dhabi’s Tourism
Development Investment Co were forced to delay plans to issue bonds. The
nation’s sheikhdoms and non- real-estate companies raised about $9bn from debt
sales as yields on Gulf bonds slid to a record 4.55 percent, the HSBC/NASDAQ
Dubai GCC Conventional US Dollar Bond Index shows.

The rate on Emaar Properties’s 7.5 percent bond due 2015
rose to 7.16 percent August 19, the highest since April.

“A lot of lenders to UAE property companies got badly burnt
in the past and they don’t have much appetite,” said Gus Chehayeb, a
Dubai-based associate director at investment bank Exotix. “Real-estate assets
on a lot of developers’ books also don’t seem attractive or liquid at this
point.”

Property markets in the UAE have been hurt more than other
parts of the Middle East by the global credit crisis. Since September 2008,
home values in Dubai slumped more than 60 percent and prices in neighbouring Abu
Dhabi dropped by half as banks curbed mortgage lending and speculators fled.

“The market is oversupplied and property transactions are
still down significantly from their peak levels,” Chehayeb said. “Prices
probably have more room to soften.”

House prices in the UAE may drop by an additional 25 percent
to 30 percent as population growth stagnates and more properties are built,
analyst Saud Masud at Dubai investment bank Rasmala predicted in March.

Dubai’s home prices are expected to decline further as
54,000 homes, or about 15 percent to 20 percent of the existing supply, comes
onto the market from 2011 to 2015, Jones Lang LaSalle Inc. estimates. Forty
percent of the city’s properties are already vacant.

About 50,000 homes in Abu Dhabi, 27 percent of the current
supply, will be completed by 2014, Jones Lang estimates. About 16,000 of those
will be ready this year.

Emaar, Dubai’s biggest real-estate developer, has been the
only major company in the industry to proceed with a debt sale this year,
raising $500m in Islamic bonds in January. The company constructed the world’s
tallest tower, the Burj Khalifa, and the Dubai Mall, the world’s biggest
shopping center.

The rate on the developer’s 8.5 percent sukuk maturing
August 2016 jumped 39 basis points to 7.42 percent this month.

“Emaar has a
diversified portfolio in Egypt, Turkey and India and a lot of its revenue comes
from fully developed properties such as the Dubai Mall and Burj Khalifa,” said
Nick Stadtmiller, a fixed-income analyst at Emirates NBD. “The picture is quite
different when you start talking about contractors or developers, where a lot
of the assets are still in the pipeline.”

Arabtec, which doesn’t have a bond, in January announced a
plan to raise $150m by selling convertible debt and shares. Two months later,
the Dubai-based company delayed the transaction “until market conditions become
more favourable.” It’s yet to announce a new date.

Arabtec shares have tumbled 13 percent this year, compared
with an 11 percent decline in Dubai’s benchmark stock index.

“Lenders don’t view the credit profiles of these companies
as particularly attractive and borrowers have to realize that the appetite is
not there anymore,” Chehayeb said. “They have to set their expectations for
pricing appropriately and they can’t expect to get the attractive pricing” that
others in the region got.

The biggest corporate bond sale in the Middle East this year
was by International Petroleum Investment Co of Abu Dhabi, which raised $4.4bn.
Emirates airline sold a $1bn bond in June.

Arabtec reported an 80 percent slump in first-quarter
profit, followed by a decline of 74 percent in the second quarter. The
inability of developers and contractors to sell bonds can’t be blamed solely on
the industry’s gloomy outlook, Emirates NBD’s Stadtmiller said in a phone
interview.

“Companies had a narrow window of opportunity to issue this
year and by July, there was a sort of a general difficulty in the market,” he
said. “That didn’t have to do with any particular sector but had to do with
international conditions and with the problems in the Euro zone, there wasn’t
as much uptake in Europe and North America for these bonds.”