x Abu Dhabi, UAEThursday 23 November 2017

New IPO just another part of Emaar's success story

For those that cannot buy property in Dubai, Peter Cooper tips a stake in the sector via Emaar Developement's initial public offering

Peter Cooper attended the press conference of Emaar's first IPO in 1987, hosted by the company's chairman Mohamed Alabbar. Karim Sahib / AFP
Peter Cooper attended the press conference of Emaar's first IPO in 1987, hosted by the company's chairman Mohamed Alabbar. Karim Sahib / AFP

It’s almost exactly 20 years since chairman Mohamed Alabbar rolled out the first $3 billion Emaar Properties initial public offering (IPO), and I remember that landmark press conference very well.

Something remarkable was clearly in the wind. The Dubai stock market then did not even have a trading floor. Foreigners were not actually able to own property. I asked Mr Alabbar what it was all about.

‘We are going to make a huge amount of money for everybody involved,’ he cheerfully told me. ‘This is the future for Dubai, real estate.’

And so it has proved. Still around 30 per cent government owned, Emaar has been a fantastic success story as Dubai’s leading real estate developer. It’s also still having IPOs.

Stakes in Emaar Malls and Emaar Misr have been sold in IPOs. This Wednesday, the IPO for a 20 per cent stake in the Emaar Development division, the builder and developer based in Dubai, will close.

Of this $1.5 billion share issue, some 90 per cent has already been covered by institutional buyers leaving just 10 per cent for the public to buy.

I think the main problem for public buyers will be getting an allocation of stock. Oversubscription looks highly likely and so applications will be diluted. But the price of those shares you do get will likely perform well, if only due to all that excess demand.

For the mothership Emaar Properties, this IPO is all about reinforcing its balance sheet by obtaining a better valuation for its Emaar Development operation. Much of the money raised will be given back to shareholders in dividends in compensation for the asset being sold.

However, I doubt whether the result for the new IPO shareholders will be anything like as spectacular as it was in 1997.

Then you doubled your money in a week and if you could hold on for another 18 months your Dh1 share was worth Dh16, a better performance than bitcoin over the past year.

It was a rollercoaster ride back in those days for Emaar stockholders. When the oil price crashed in late 1999 those same shares slumped to under Dh2.

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They did not really take off again until late 2004. Then there was another huge price run up to Dh31 until another crash in 2006.

Newly minted Emaar Development shares will probably be a more volatile than its holding company Emaar Properties simply because it will not have the same balance of income from shopping malls, hotels and overseas projects.

However, brokers note that Emaar Development has profit margins in excess of 35 per cent and formidable borrowing power in global financial markets akin to Emirates Airline. It is also conservatively managed and has never overborrowed in the past, the usual achilles heel to any property development company.

Emaar Development also has a highly respected global brand, an excellent land bank, a broad spread of projects and outstanding off-plan sales. What is there not to like?

So really this is a pure play investment on the future of Dubai real estate. If you can’t afford a property in Dubai but want to invest now in this sector, this might well be the way to go.

I once bought Emaar shares in 2002 thinking they might take off again and that would eventually repay my mortgage. But I got bored with their non-performance by late 2004.

If only I had been more patient, I would have been able to pay off the whole mortgage just 18 months later as the shares went on to rise fifteen-fold.

Therefore if you do decide to go down this route, try to be a little more resilient than I was back then. Jumping in and out of stocks is not a very good idea. Having the right idea and sticking with it certainly can work, if you let it.

Personally I am quite bullish about the outlook for the Dubai Financial Market over the next few years. The index has never recovered to the highs of 2006 and valuations are less than half the lofty heights seen on Wall Street these days.

And yet the IMF expects GDP growth to triple to 3.4 per cent in the UAE next year and Brent Crude has passed $64 for the first time in two-and-a-half years. Tourism and aviation is also up thanks to the sharply lower US dollar. Dubai World Expo 2020 public spending is just getting going.

Emerging market stocks like those listed on the DFM look rare bargains in a world of over-priced assets, and Emaar Development is nicely positioned to leverage up on the Dubai recovery story.

Its newly appointed chief executive Chris O’Donnell is the man who once built the Palm Jumeirah for rival Nakheel.

Emaar Properties' shares fell 6.1 per cent last week following the Saudi anti-corrruption arrests which might prove an attractive entry point.

Then again global stock markets are overdue for a correction and when that happens even the blue chips like Emaar will be sold to raise cash in an emergency. That might be the better and classic buying opportunity.

Peter Cooper has been writing about finance in the Gulf for more than 20 years