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Silk Invest pens an engaging piece highlighting the paradigm shift taking place in Morocco, which the investment manager projects “will result in medium term GDP growth of at least 5.5% annually.”

The kingdom has undertaken a number of strategic liberalizations and a revision of its legal framework that investors should now take notice of . . . combined with the modernization of its infrastructure and a new focus on upgrading the educational system.

Central to the country’s vision to become a strategic regional hub in terms of shipping and services is a continuing economic and social “convergence” with the European Union (EU), whereby “the country is benchmarking its ‘openness’ policy on EU regulations and norms.”  Negotiations successfully concluded last month between the two parties over agri-food and fisheries, for example, provide evidence of this growing, friendly framework.  Moreover, a la its Asian neighbors, Morocco is fervently spreading its influence into resource and demographic-rich sub-Saharan Africa, a sure way to ensure strong future cash flows.  “Maroc Telecom and Attijariwafa bank are clear leaders in this trend,” Silk notes.  Finally, per Youssef Lahlou, a portfolio manager with Silk Invest’s Casablanca-based office, the country’s real estate sector, “with a shortage of 1.5 million housing units, especially in the low-income and the mid-range segments,” could be prime for a bounce back. “Companies operating in this sector (especially Addoha and Alliance) are set to reap the fruits of the accelerating demand,” Silk writes.  One specific facet of this increasing business relates to low cost housing; thanks to economies of scale in production, coupled with government subsidies and tax breaks, developers can make handsome profits.  That said, warned Fouad Ammor, a Rabat-based economist, much of the housing may still remain outside of the price range of its would-be inhabitants.

While touting Abu Dhabi-based Aldar Properties, investment bank Prime Holding notes in a recent research note that “the prevailing economic downturn has had a limited impact on Abu Dhabi’s long-term development plans,” and that “the Capital’s rich hydrocarbon reserves and years of prudent fiscal spending have helped Abu Dhabi maintain an enviable liquidity and financial position with sovereign reserves estimated at over USD600 billion.”  That said, “[the emirate’s] real estate sector continues to suffer from years of underinvestment and therefore exhibits strong pent-up demand for prime-quality residential and commercial units, retail and hospitality space.”  Prime’s sum-of-the-parts (SOTP) DCF analysis yields a fair value of AED5.8 per share, “indicating an upside potential of 17.2% over the current market price.”

A potential secular property convergence in Abu Dhabi can also be traded via Sorouh Real Estate and RAK Properties, the emirate’s second and third ranked property firms by market cap.

imagesKuwait-based Abyaar Real Estate Development Company (Abyaar), which develops and manages properties in the UAE and in Dubai in particular, recently announced a net profit for the first nine months of 2009 of KD5 million ($17.5 million) and an EPS of 6.90 fils (a subdivision of currency used in many Arab countries, where KD1 roughly equals 1000 fils).  Per its chairman, Hesham Abdul Wahab Al Obeid, the firm reduced financing debt during the period by 30%, down to KD 77 million, compared to KD108 million during the same period of 2008.  Owners’ equity also increased, up to KD146 million.

The strong showing begs the question how quickly Abyaar will return to the debt markets; in October 2008 it postponed a proposed sale of Islamic bonds worth up to $1 billion in order to finance its expansion plans.  Rashed Al-Rashdan, its managing director, said in the summer of 2008 for instance that the developer was looking to expand “aggressively” into other “high growth” markets in the region, including Saudi Arabia and Qatar.  At least the market seems convinced of its future operating and financing revenue stream–earlier in the year the company successfully increased its  capital base from KD 53 million in 2008 to KD 106 million in 2009 through a new share subscription.

 

Faraj Al-Khudhari, Chairman of the Kuawait-based Al-Mutakhasses real-estate company, announced yesterday that although the year began with bearish indicators, where the value of the property transactions amounted only to 79 million Kuwaiti dinars in January, it has since grown, reaching KD 114 million in February.  The value of real-estates deals grew further, posting KD 151 million in March, which may signal that the sector could witness a record leap in the months ahead.  The number of the deals has increased from 294 in January, to 358 in March and 434 in April.  Al-Khudhari linked this upward trend to an increase in loans by banks and also a desire among investors to take advantage of the period of the low prices before the projected upsurge of prices.

Dubai’s Real Estate Regulatory Agency (Rera) recently reported its official rent index for the month of April and disclosed a 10 to 15% drop in rental prices.  However, a new unofficial index, compiled by Landmark Advisory, which shows an up to date picture of the market (Rera’s relies on figures from July 2008, when the market was at its peak) and which will be published every two months, reflects a fall in rentals of up to 45%.  According to the data, a studio in Jumeirah Lake Towers that was going for Dh90,000 in the market last year, for example, is now being offered for Dh50-55,000.

Memon Investments, a Dubai-based property developer, predicts a recovery in UAE’s real estate sector within 8-12 months, citing the federal government’s $20 billion bond program that will help to ease liquidity and to alleviate debt burdens shouldered by cash-strapped property firms. Moreover, Memon also notes that construction costs per square foot in the UAE have declined by an average of 30% since the start of the credit crunch, a decline which should make prices for completed projects more affordable and ultimately help to stimulate demand. Such decreasing costs include the prices of steel and other materials including aluminum, wood, glass and diesel, as well as the declining cost of labor and supervision.

Dubai’s property companies will probably be the first to get support from the emirate’s $10 billion bond sale, according to Nasser Bin Hassan al-Shaikh, director general of Dubai’s Department of Finance.  U.A.E.’s central bank purchased half of a $20 billion note issued by Dubai to provide the emirate with funds needed to meet its financial obligations.  That said, analysts are skeptical whether the cash injection will be anywhere near adequate in light of the fundamental problems of the real-estate and banking sectors.  In fact, Dubai rents are expected to fall as much as 40% in high-end areas this year, said one commentator.  Per Bloomberg, Dubai’s property industry is slowing after a five-year boom as banks cut back on mortgage loans and speculators leave. Real- estate prices have fallen 25% in Dubai from September’s peak and 20% in Abu Dhabi.  As such, many property companies are looking to sell stakes in “non-core” units in order to raise cash as the property market slows.

Property prices in the UAE will likely drop by another 15% (adding to the 25% decrease in the fourth quarter of 2008), according to a report issued by Nomura Securities, an investment bank. “The property sector is maturing at breakneck speed and a shakeout will see more casualties, with this year marked by consolidation as companies struggle to stay afloat,” noted one analyst.

That said, Nomura gave the region’s top property developer, Emaar Properties, a “buy” rating, with a target price of Dh2.87. “Emaar is the largest and most liquid company under our coverage and benefits from strong government support,” the report said, adding that Emaar is now entering the second stage of its maturity cycle, and expects to derive 12 -15 % of its net profits from recurring income streams. Furthermore, Emaar has low net debt gearing and no apparent imminent refinancing issues.

Other Nomura calls on UAE property names:

Deyaar Development and Union Properties (Dubai) – Reduce

Sorouh Real Estate and Aldar Properties (Abu Dhabi) – Neutral

RAK Properties (Ras Al Khaimah) – Neutral

Nomura did write, however, that “the prospects of a [proposed government-directed merger] with Deyaar may be a cause for re-rating Union Properties, with cash liquidity still a core issue for the latter.”

JGW

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