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Emaar’s bond outperforms Aldar’s on strong revenue

Emaar Properties’s Islamic bond generated more than double those of Abu Dhabi’s Aldar Properties returns due to the revenue from hotels and malls supported Emaar.

Emaar’s 8.5 percent Islamic bond, or sukuk, due 2016 returned 8.2 percent since it first traded January 27, according to data compiled by Bloomberg.

Aldar’s 10.75 percent bond maturing 2014 returned 3.8 percent over the same period. The HSBC/NASDAQ Dubai GCC Corporate Sukuk Index posted returns of 6.7 percent and the conventional corporate bond index 6.3 percent.

“Emaar’s hotels, malls and rentals are doing very well” as Dubai’s tourism industry rebounds from the credit crisis, Majed Azzam, a property analyst at AlembicHC Securities, said in a Sept. 5 phone interview. Aldar “is in a bad shape in terms of its balance sheet and cash flow, and the outlook for Abu Dhabi’s real-estate sector is still very weak,” he said.

Emaar’s diversification into hotels and malls is helping it weather a slump in demand for homes in Dubai two years after the sheikhdom received a $20bn cash injection from the central bank and the Abu Dhabi government to help it through the credit crisis.

State-controlled Aldar, Abu Dhabi’s biggest property developer, needed a 19.2bn ($5.2bn) bailout from the government in January to repay debt.

Real-estate demand in the United Arab Emirates evaporated at the onset of the credit crisis in mid-2008, which caused home prices in Dubai and Abu Dhabi to slump by 64 percent and 45 percent respectively. Emaar has been supported in the past year by revenue from its hotels and Dubai Mall, the world’s biggest. Aldar’s hotels have yet to generate profit and the company had to sell assets including a Ferrari theme park and convertible bonds to Abu Dhabi’s government to pay creditors.

“Many investors would consider buying the sovereigns of Abu Dhabi and Qatar and government-related entities who offer better risk-reward over Aldar issues,” Parth Kikani, assistant fund manager at Al Mal Capital in Dubai, said in a phone interview. The state debt issues “aren’t associated with the troubled real-estate market and have healthy balance sheets.”

The cost to insure Dubai’s debt against default jumped 17 basis points yesterday to 420, after hitting this year’s low of 316.6 on June 7, according to five-year credit default swaps from data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Abu Dhabi’s credit default swaps rose 3.9 basis points to 106 basis points yesterday, the most in 10 days.

The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent, should a government or company fail to adhere to its debt agreements. Dubai’s credit default swaps peaked at 655 basis points in November 2009 after state-owned Dubai World announced plans to restructure about $25bn of debt.

Abu Dhabi’s construction boom was hurt by the financial crisis at a much earlier stage than that of neighboring Dubai, which by mid-2008 had completed more projects and attracted more buyers. Since then, Abu Dhabi’s decline has been slower than Dubai, the worst-performing market in the Middle East.

Dubai, which doesn’t have a credit rating, borrowed about $113bn in a bid to become a regional financial and tourism hub, according to an IMF report published on June 16.

Emaar reported a profit in the third quarter of 2009 for the first time since the global financial crisis began. It has reported a profit in all the quarters since, helped by the delivery of apartments in Burj Khalifa, the world’s tallest tower in Dubai. Aldar, which is building thousands of homes and offices in the UAE capital Abu Dhabi, reported a profit only in the past two quarters, after the government bailout.

Abu Dhabi, home to more than 7 percent of the world’s proven crude oil reserves, is planning to spend $500bn by 2030 to reduce its dependence on energy by investing in industries including real estate and aerospace. The emirate has the world’s biggest sovereign wealth fund with more than $300bn of assets under management, according to the International Monetary Fund.

Last month, the Emaar sukuk’s residual maturity fell to five years, said Nick Stadtmiller, a fixed-income analyst at Emirates NBD. “This potentially opened the sukuk up to a larger pool of investors who have mandates to buy bonds that mature in five years or sooner.”

“For sukuk, it is especially important because of the relative scarcity of issues in this region available for investors with Islamic mandates,” he said.

Aldar’s second-quarter net income was AED 127.3m compared with a loss of AED475.3m a year earlier. Emaar’s quarterly profit dropped 69 percent to AED250m as the developer wrote down the value of a bank investment and delivered fewer completed homes.

House prices in the UAE are expected to drop further as the completion of projects adds to a glut of homes. About 50,000 homes in Abu Dhabi, 27 percent of the current supply, will be completed by 2014, Jones Lang LaSalle Inc. estimates. Some 16,000 of those will be ready this year. In Dubai, about 54,000 homes will be put on the market from 2011 to 2015, adding 15 percent to 20 percent to the existing supply in a city where 40 percent of properties are vacant.

“The outlook for Abu Dhabi’s real-estate sector is definitely still very weak because of the oversupply,” said Azzam at AlembicHC. “However, Aldar is selling most of its projects to the government and de-risking its balance sheets, which ideally should result in better performance of the bonds.”

Aldar has AED18.1bn of outstanding debt compared with AED10.1bn at Emaar, according to data compiled by Bloomberg. Moody’s Investors Service in June downgraded Aldar long-term debt two steps to B2 from Ba3 with negative outlook, saying that prospects of future government support for the developer appear less certain.

“Aldar’s bonds are likely to remain flat in the remaining half of this year, while Abu Dhabi and Qatar sovereign issues are expected to outperform because of their solid credit ratings and healthy balance sheets,” Al Mal’s Kikani said.


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