American-British credit rating giant Fitch sees a prolonged Iran conflict resulting in liquidity concerns for the UAE’s real-estate players, with business prospects of smaller companies coming under strain.
Stating that smaller developers face higher pre-development costs due to the disruptions in the supply chains, amid the ongoing Strait of Hormuz blockade, Fitch also cited the rising debt costs across the GCC region as a threat to the industry. Not only has the ratio touched its five-year highs, but banks are now treating smaller projects as high-risk, thereby making the loans expensive and hard to secure.
“In the current scenario, there is liquidity in the market because real estate in Abu Dhabi and Dubai is heavily regulated, with funds held in escrow, based on completion,” said Paul Lund, Head of Corporate Ratings, Middle East & Africa, Fitch, while interacting with Zawya.
According to Lund, if the Iran war drags on further, the risk of committed investors cancelling or adopting a more cautious investment approach could eventually weigh on developers, forcing them to adjust their operational plans due to shrinking market opportunities.
“What that means is reducing the number of developments or extending project [deadlines] further into the future. But the big question on liquidity is the degree to which developers have committed to their land banks. The speed at which developers build on those land banks can eat into their liquidity,” Lund remarked.
Noting the existing practice of developers using land banks (often through partnerships) to unlock liquidity, improve capital efficiency and shift pre-development market risk, the senior Fitch official continued, “This is why I think developers like Binghatti are pushing more into villas, which are more horizontal and easier to manage timelines on.”
“We have effectively put a sector ratings watch on some Dubai home builders, including Binghatti and Omniyat. The starting position of those ratings is quite good. These companies have strong liquidity. They have large amounts of funds in escrow to support the new developments. Plus, both developers had a bond issuance to finance their build programmes,” Lund concluded.