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Dubai property company merger will dominate real estate sector

Opinion is divided as to whether the merger of Emaar Properties and three companies in the Dubai Holding Commercial Operations Group will have a positive or negative impact in the short term.

A special report from Moody's Investors Service says that it will create a dominant entity in Dubai's property market that would control the market as well as benefit from economies of scale and stronger bargaining power vis a vis contractors.

'Moody's recognises that consolidating Emaar and DHCOG's real estate interests into one entity will create a new giant in Dubai's market, with unrivalled access to a sizeable land bank,' says Martin Kohlhase, an associate analyst in Moody's Corporate Finance Group and author of the report The Dubai Property Market in the Wake of Consolidation.

'Furthermore, several drivers such as the opening of Dubai's Metro, the inauguration of Burj Dubai, the world's tallest skyscraper and the end of the school year/beginning of the summer period will shape Dubai's residential property market in the near term and lead to greater differentiation within Dubai's residential areas, from which Emaar and DHCOG's real estate divisions may benefit,' he continues.

However he also warns that larger government ownership in Emaar may not be sufficient to mitigate the detrimental impact that the merger would have on the company's fundamental creditworthiness.

'Furthermore, ongoing market weakness and the prospects of weaker cash flow over the near to medium term will impact the combined group going forward,' he adds.

Saud Masud, a property analyst at the Swiss investment bank UBS, said that while the merger was good for the long term the new company will face challenges in the short to medium term.

'I still think the deal is much needed for the long-term stability of the market but in the near term to medium term it limits potential for earnings upside,' he added.

Also Moody's notes that the Dubai residential property market generally remains oversupplied and the downward trend in the market is unlikely to stabilise before the second half of 2010. Furthermore, large-scale lending has not resumed and property developers have recorded a number of buyer delinquencies.

Moody's outlook for the GCC real estate sector for the coming 12 to 18 months remains negative.