Moody's assigns A2 rating to Qatar Real Estate Investment Company

The outlook is stable. This is the first time that Moody's has assigned credit ratings to Alaqaria.

"Ratings are supported by the predictable, long-term rental income Alaqaria generates primarily from government and government-related sources", says Dubai/DIFC based Philipp Lotter, a Senior Credit Officer at Moody's and lead analyst for Alaqaria. "However, challenges associated with executing an ambitious project pipeline and resulting increases in leverage constrain ratings", Lotter adds.

With the Aa3-rated government of Qatar directly owning 27% of Alaqaria, Moody's views the company as a government-related issuer (GRI), and therefore determines its ratings on the basis of both the company's fundamental creditworthiness, and the credit enhancement that can be achieved from government support.

Alaqaria's fundamental credit strengths are underpinned by the stable, predictable and long-term rental revenues the company generates from retail and commercial properties situated in the key industrial cities of Qatar, thus providing housing infrastructure to the rapidly expanding hydrocarbon industry. Approximately 80% of Alaqaria's rental income is derived from Qatar Petroleum (rated Aa3), its affiliates and partners, with this proportion expected to rise even further as new developments complete. Accordingly, Moody's regards large parts of Alaqaria's business more as an ancillary service provider to the government, rather than a conventional real estate company or homebuilder.

Ratings are also supported by the quasi-monopoly status Alaqaria enjoys in the provision of long term housing and related infrastructure to the country's energy sector, and to Qatar Petroleum in particular. While Moody's cautions that this monopoly is not defined by law, it is enforced by Qatar Petroleum's strategy of outsourcing real estate projects to a single trusted source, and Moody's therefore regards the risk of Qatar Petroleum or the government using competing providers as limited. Further rating strengths include the company's ability to pass on increased maintenance costs through regular rent reviews, as well as the limited construction risk the company bears, given the fixed-price agreements it enters into with construction contractors.

At the same time, ratings are constrained by the company's modest size, particularly in relation to the substantial project portfolio it intends to execute over the coming years to meet the housing demand from large-scale hydrocarbon projects. This is likely to result in a material increase in debt required to fund the projects over the coming years.

Moody's also recognises the company's intentions to grow its higher risk commercial real estate business, though takes comfort from management's self-imposed restriction to limit this business to no more than 20% of operating income going forward.

Given these strengths and challenges, Moody's views Alaqaria's fundamental creditworthiness reflected in a baseline credit assessment in the Baa range. However, Moody's also believes that the likelihood of the government of Qatar lending exceptional support to Alaqaria, if required -- either directly or through Qatar Petroleum -- to be high.

Together with high dependence between Alaqaria and Qatar, the credit enhancement that is achieved as a result of this support positions Alaqaria's rating at A2.

Alaqaria's ratings are stable and assume that the company will focus predominantly on its core business, deliver on its projects and continue to operate under its current favourable framework that allows it to earn pre-determined returns under fairly moderate risk. Ratings also assume that the company will manage its financial profile in accordance with certain parameters, whilst continuing to benefit from a highly supportive government. In particular, ratings do not assume that the government will reduce its stake any further from its present level.

Qatar Real Estate Investment Company ("Alaqaria"), headquartered in Doha / Qatar, provides housing and related facilities in industrial cities under long term contracts to Qatar's growing hydrocarbon sector. It is 27% directly owned by the government, with the remainder listed on the Doha Securities Market. In 2006, the company had revenues of QAR 328 million (USD 90.1 million).