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Real estate in the Gulf not yet at bottom as prices not low enough for vulture funds, report says

Prices are likely to remain depressed and a dip in rentals is also expected due to an increasing supply of vacant property and recovery is not expected until 2011, according to a new report from global investment bank Nomura International.
‘There is not yet enough return for the vulture funds unless prices are discounted further. The emergence of vulture investing will mark the low point in the current pricing cycle but it will probably not be enough to absorb oncoming supply so any recovery will be muted,’ said Chet Riley, Equity Research, Middle East at Nomura.
Nomura analysts expect 2010 to be as difficult as 2009 was. ‘Capital values are driven more by capital flows than rental values but we are not seeing new capital yet. The United Arab Emirates services a regional population of more than 1.5 billion and arguably is the trade hub capital of the world, so we believe it is difficult to dismiss Dubai and the wider UAE on long-term fundamentals,’ the report said.
Looking ahead the report says that a development lead time of five years does give places like Dubai time to absorb the over supply and ‘normalise’ the real estate market.
‘But it will take some time. We are seeing signs of stabilisation but the residual risk has not fully unwound yet. When the risk does unwind, the financially weak developments are sidelined for good and the looming oversupply situation is resolved, we will become more positive on the macro real estate fundamentals,’ the report adds.
According to the report the real estate sector is currently in mid-cycle with real estate secondary prices stabilising but project financing for new or stalled developments is still virtually impossible. ‘Until the financing of these developments can be bridged, there will be a sector stalemate with real estate trying to transfer the purchasing risk and the banking sector not willing to accept it,’ the report says.
Dubai is also seeing a huge drop in the number of developers now operating. At the peak of the market the Real Estate Regulatory Agency estimated that there were 800 developers in Dubai alone. The last official count suggested 473 and Nomura analysts believe this could drop to less than 100.
The report points to property companies increasingly selling equity stakes in ongoing developments in order to ‘round trip’ equity and de-risk balance sheets. UAE developers have also been forced to evolve rapidly and build up rental portfolios.
It points out that rental streams can be capitalised to provide alternate sources of funding for developers. A recent example is Union Properties which has transferred about 2,000 unsold units to its general rental portfolio and thus increased its rental income to offset against a decline in sales.