x Abu Dhabi, UAEFriday 28 July 2017

A welcome note showing signs of upturn

It was an investment bank research report that pricked the UAE property bubble last summer.

It was an investment bank research report that pricked the UAE property bubble last summer; perhaps now another analyst's note will set in train the process of reflation across the crucial real estate sector. As the UAE sizzled last August, Morgan Stanley produced an innocuous-seeming piece of research into the property sector, which forecast a 10 per cent dip in property prices for the rest of the year. The rest, as they say, is history. The equity market went into a tailspin as it found confirmation of long-held fears that real estate, the dynamo of the UAE, and especially Dubai, economies, was overpriced.

Although there were more significant dog days to come - notably the collapse of Lehman Brothers the following month - from that August day onwards the market knew that something was wrong in the UAE and a reckoning was looming. Yesterday, we saw the first signs that we might be pulling out of the nosedive that ensued. HSBC, an international bank of at least equal stature to Morgan in terms of research capability, produced a report entitled Bottoming Out, which effectively calls the bottom of the property sector and offers the first tentative signs that the nightmare may be over.

The stock markets, dominated by property stocks, certainly thought so, with the Dubai Financial Market ending yesterday 4.8 per cent ahead at 1,878. Coincidentally, the HSBC note followed another bullish expression of confidence from the UAE Central Bank, which said UAE real estate was "fine". The HSBC research was a little more scientific than that. Based on a quantitative analysis of property transactions in April and May, it said that agreed prices were up 4 and 5 per cent respectively in those months. That is different, of course, from advertised prices, implying that vendors are willing to accept more realistic offers for their property, but it proves the normal forces of supply and demand are beginning to reassert themselves.

The damage the sector has suffered since the Morgan Stanley report is enormous. Morgan's forecast of 10 per cent, which caused such a fuss at the time, turned out to be hugely conservative. HSBC estimates there has been a 65 per cent decline since last September. That is truly staggering, but if you accept we are now at the bottom, at least it is a "known", rather than a frightening "unknown." With such a fall, there must be value to be had, especially in Dubai.

There are other positive signs, according to HSBC. Liquidity is returning as mortgage lenders raise loan-to-value ratios and free up some credit; there is downward pressure on mortgage rates as regional money markets slowly thaw; deposit rates have fallen since the start of the year, making it less attractive to simply let cash sit in the bank; rental yields remain attractive, leading to robust volumes and improving sentiment.

Vendors have adapted to the new reality, HSBC says, by cutting prices and pulling excess supply off the market, or by renting them. Despite the renewed efforts of the mortgage lenders, cash is still king and foreigners are taking the first tentative steps back in to the market. Maybe all those Dubai scare stories in the foreign press were less effective than we thought at the time. The main corporate beneficiary from the upturn, according to HSBC, will be much-maligned Emaar, which as Dubai's leading developer was an obvious "sell" story when the deleveraging was raging. Now, HSBC puts a target price of Dh8.5 on the stock, compared with yesterday's Dh3.47, which was up 10.2 per cent.

There are still significant threats to the improvement scenario. The most potentially serious is the dreaded "exodus" some Cassandras are predicting once the school year ends later this month. This is such a complicated variable - with conflicting evidence coming from indicators such as removals bookings, next year's school enrolments and current opinion polls - that it is almost impossible to call. But it seems certain the long summer period, followed by Ramadan, will see some further volatility and price softness. Many will wait until September to jump back into the property market. And who knows what imponderables might arise from the wider geo-economic world?

But the HSBC report draws a rather different picture from the all-pervasive gloom-and-doom we have become accustomed to recently. As I have said before in this column, there are now plenty of sightings of "green shoots" in the UAE as well as the global economy. If the UAE property market really is on the turn, it represents a major blossoming for the regional flora. @Email:fkane@thenational.ae