HSBC initiates coverage of Sorouh Real Estate with 'overweight' rating

The reasons for the positive view are the strength and potential of the Abu Dhabi real estate market, and the relatively low-risk in Sorouh's business model.

Sorouh is Abu Dhabi's second biggest real estate company after Aldar, and HSBC's report on Sorouh follows the same team's note on Aldar Properties that appeared in June 2007.

The report explicitly compares Sorouh to Aldar, and points out to investors that Sorouh's business model is fundamentally different from Aldar's based as it is on plot sales, as opposed to development and investment, and therefore provides investors with a lower risk profile.

"It is not a matter of which strategy is right or wrong," explains Walid Khalfallah, Head of Equity Research at HSBC Middle East, "but where the company chooses to lie on the risk curve. Aldar provides greater risk, but also greater potential upside in the share price."

The report also contains a detailed analysis of the Abu Dhabi real estate market, and highlights some noteworthy trends and facts:
•Abu Dhabi housing prices when compared to per capita GDP are among the lowest on the world
•Rental yields in the office property market in Abu Dhabi are among the world's highest at 8%
•Abu Dhabi has one of the world's tightest office markets, with only 1% of office space lying vacant
•Abu Dhabi is "significantly under-supplied" with retail property space, in spite of an increase of 220% in total retail space in the emirate since 2000

"We are recommending that investors are overweight in Sorouh, and suggest a potential 35% potential upside in the share price," added Khalfallah. "This is in spite of the fact that Sorouh has out-performed Aldar by 33% this year, suggesting that the market is still hesitant about the outlook for the Abu Dhabi real estate market, rewarding the lower-risk land sales model. Even taking this into account, we calculate that the stock is undervalued."