Investors in UAE markets have been on a roller coaster, piling into and out of property stocks in the first quarter of this year, driven by fresh hopes the sector will be this year's comeback kid.
But analysts at the investment banking group Merrill Lynch are among the increasing number of voices that believe the fundamental value of UAE property is now priced in and that only real earnings growth in the sector will justify further investment.
"The Mena [Middle East and North Africa] real estate stocks in our coverage universe have rallied by 44 per cent in the year to date, driven by greater risk appetite, but we do not see further upside as fundamentals have not materially improved," the analysts said in a note.
Merrill Lynch recently downgraded Sorouh Real Estate, its previous top pick, from "buy" to "neutral", after a strong share price rally triggered by solid fourth-quarter results.
Speculative plays based on takeover rumours - as seen most recently with the 15 per cent one-day rise in Arabtec's share price after Aabar raised its stake - move many property shares.
But despite being heavily traded - 31.8 per cent of the total value of shares traded on the Dubai Financial Market in March were property-related - the sector was among the biggest listed losers last month, contracting 8.3 per cent.
Merrill Lynch expects the UAE to continue suffering from residential oversupply and weak consumer confidence, even though prices have fallen by 50 to 55 per cent since their peak in the third quarter of 2008, making the market more attractive for tenants.
Investors should beware of building their investments on sands that are still shifting.