Top down, demand is now the key
issue, as it is being undermined by
affordability, the credit squeeze, and
negative sentiment
􀀗 Bottom up, it is not about a potential
price correction, but rather the longterm
demand story (ie, oil prices)
􀀗 We retain our Overweight (V) rating on
Aldar, Emaar, and Sorouh, but cut our
target prices to reflect purely
macro concerns
Our proprietary analysis of supply dynamics in Dubai
suggests that forecasts are overstated. Our findings differ
considerably from those of many in the market. We estimate
that no more than 95,000 units (10% CAGR) and 195,000
bedrooms will hit the market by 2010.
The central issue is no longer oversupply but demand, which is
being undermined by several factors. Price appreciation is
breaching affordability, as illustrated by the compression of
rental yields. This will be further amplified by upward pressure
on mortgage rates and declining loan-to-value (LTVs). The
situation has not been helped by the stock markets’ steep
decline, which highlights the fact that the region is not immune
to global trends. The fall-out from the markets’ decline is
wealth destruction and risk aversion. All this, combined with
the weeding out of speculatively driven demand and incessant
corporate scandals, is bound to lead to some price weakness.
While the global credit crunch is placing a strain on domestic
liquidity, we believe that Aldar, Emaar, and Sorouh have
enough funds to finance their near-term investment needs.
Bottom up, it is not about a potential price correction but the
long-term demand story (volumes rather than prices). While
we remain strong believers in the domestic demand story, to
address macro concerns we apply probabilities to the
companies’ projects based on visibility and viability in the
event of a downturn. We also revise our beta for all three
companies to reflect increased market volatility. However,
we maintain our price assumptions, which are already at a
c20%-30% discount to current market prices. Our new target
prices for Aldar, Emaar, and Sorouh, imply 24%, 10%, and
35% discounts to NAV, respectively.