Bond drought benefits Emaar sukuk as property slump saps shares

The slowest start to any year since 2010 for sales of Shariah-compliant bonds from Arabian Gulf countries is working out just fine for holders of debt from Dubai’s Emaar Properties.

The company’s Islamic bonds are clinging to gains even as shares in the Dubai-based developer slide. Its Shariah-compliant notes due July 2019 rose 0.4 per cent to 113.268 this year at 10.10pm in Dubai on Tuesday, about a percentage point from a record high. Emaar’s shares, meanwhile, have declined 9.1 per cent in the period to the lowest in more than two months.

The resilience of the bonds underlines the lack of options for investors seeking Shariah-compliant assets in the six-nation GCC, after sales of new sukuk dropped by 47 per cent from a year ago. Emaar’s shares retreated after the company this month announced a lower-than-anticipated 2014 dividend. Dubai real estate prices dropped the most in the world in the second half of last year, Frank Knight said this week.

“Given the limited supply of GCC corporate dollar sukuk, yields are grinding lower in the space and investors have held on to the Emaar 19s for their decent carry and lower duration,” Deepti SM, a Bangalore-based credit analyst specialising in property at SJS Markets, said by phone on Tuesday.

GCC borrowers raised $1.5 billion in Islamic bonds in the year through Tuesday, compared with $2.8 billion for the same period in 2014. It’s the weakest start since $450 million was raised through March 17 in 2010.

Emaar shares fell for a third day on Tuesday to Dh6.6, the lowest close since January 6. Their 14-day relative strength index dropped to 29. A level below 30 indicates to some investors a security may be oversold.

Home prices in Dubai dropped 6.2 per cent in the second half of last year, the worst performance of 55 real estate markets tracked by Knight Frank during the period.

While the decline in real estate prices “is having an impact on equities, it isn’t immediately affecting the sukuk,” Abdul K Hussain, the Dubai-based chief executive of Mashreq Capital DIFC, which runs the two best-performing Islamic fixed-income funds in the Middle East and Africa over the past year, said by phone. “The stock is a bit more sensitive.”

The yield on Emaar’s 2019 notes decreased 24 basis points this year to 3.1 per cent, compared with a 15 basis-point slide in the average yield of Middle East Islamic debt to 4.2 per cent through Monday, according to JPMorgan Chase & Co indexes.

The bonds have not been immune to selling pressure. The yield rose 13 basis points this month, tracking the JPMorgan Middle East sukuk yield index, which added 13 basis points through Monday. The relative strength index of the Emaar notes slipped to 34, the lowest since December 19.

Emaar’s profit climbed 28 per cent last year to Dh3.3bn due to an increase in revenue from hotels and malls, the company said on February 15. Its board proposed paying 15 fils a share for 2014, the developer said in a statement March 5. That compared with a 2013 dividend of 15 fils plus one bonus share for every 10 held.

“As far as equity goes, they are more volatile than bonds,” Deepti SM said. “Emaar remains a fundamentally sound credit.”

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