Cash-rich Dubai developers expected to withstand cyclical downturn

The emirate's property market could start to cool over the next 12 to 18 months, S&P Global Ratings says

Investments from high-net-worth individuals, strong economic growth as well as population growth have helped the property sector to record growth in Dubai. Victor Besa / The National

Dubai's property market could start to cool over the next 12 to 18 months amid the global economic pressures, but the emirate’s developers will be able to withstand the turn in the cycle due to their strong liquidity position, according to a new report.

“We expect developers to continue to accumulate cash and improve liquidity buffers in preparation for the next cyclical trough, given their off-plan pre-sales remain healthy,” S&P Global Ratings said on Monday.

“While developers' cash flow generation and credit metrics could weaken, ratings should be able to absorb the downside pressure, assuming the market correction is mild.”

Property prices in Dubai, the commercial and tourism hub of the Middle East, have risen at double-digit rates per year since 2021, driven by government initiatives and strong demand from buyers.

Dubai has been ranked as the world’s fourth most active market in the luxury residential segment amid higher property sales.

The emirate recorded the sale of 219 homes priced above $10 million last year, with the total value of the transactions reaching $3.8 billion, global property consultancy Knight Frank said in a report earlier this year.

Dubai ranks behind New York (244 sales), Los Angeles (225 sales) and London (223 sales).

The emirate registered a 40.7 per cent annual jump in the volume of residential sales valued at more than $10 million in the third quarter of 2023.

The volume of homes priced over $10 million in Dubai – the commercial and tourism centre of the Middle East – totalled more than $1.59 billion in the July-September period, according to Knight Frank.

As real estate prices continue to rise in Dubai, the risk of a cyclical reversal is mounting, S&P said.

It expects property prices to increase 15 per cent to 18 per cent in 2023 and by another 5 per cent to 7 per cent in 2024 as the Dubai market gradually slows down.

“We don't expect a profound market disruption. Instead, we think price increases could decelerate and potentially slightly reverse over the next 12-18 months, with price declines not exceeding 5 per cent to 10 per cent,” S&P said.

Developers will record strong cash generation and higher earnings before interest, taxes, depreciation and amortisation (ebitda) in the run-up to the next cyclical trough, according to the report.

“This will support further deleveraging and build a buffer for the next cyclical correction,” the rating agency said.

“The balance of power has shifted in favour of developers over the past couple of years. Therefore, we believe their credit quality should be more resilient to a softer price environment or fewer transactions.”

New property launches are expected to continue, despite the expected downturn, it said.

Developers “are also likely to launch smaller units since the price per square foot has become expensive and buyers are starting to downsize spaces. This contrasts with an earlier preference for larger properties following pandemic-related restrictions,” it said.

The rating agency said it already factored in the industry's cyclicality and the emirate's particularly volatile and sentiment-driven demand while assigning credit ratings to Dubai’s developers including Emaar Properties, Damac Real Estate Development and PNC investments, also known as Sobha Realty.