Is Emaar Properties a buy?

A leading member of one of the Gulf's most prominent families says that his family believes Emaar Properties' shares are worth three times their current value. More conservatively HSBC, the largest global bank in the Middle East, issued a research document this week suggesting that Emaar is being significantly under-priced by the Dubai Financial Market.

Who is right? And if both a prominent national family and the world's second largest bank think Emaar shares are cheap, why are they not going up?

Emaar Properties, for those who have not been keen observers of Dubai over the past few years, is a partly privatised, Dubai Government controlled, property developer whose shares were floated at Dhs10 just over three years ago, peaked at Dhs160 and have hovered around Dhs20-25 for over a year.

Let us start with our national friend's view. Here the perception of true value is based on the land granted to Emaar by the Dubai Government at the time of its initial public offering in late 1997. Emaar holds many of the prime development sites in Dubai, for which it has paid nothing. Re-value this asset at market prices and the share price could be three times higher than it is today.

The HSBC document attempts to unravel the risk profile of the company. The conclusion is that the stock market is over compensating for construction risk in the build out period, and that demand should comfortably absorb Emaar's flow of real estate on to the market. Indeed, the report notes that the current uptake of new real estate is very strong, particularly for high quality real estate, and that is Emaar's forte.

The caveat is that Dubai has to maintain its progress as a regional business hub, and continue its phenomenal growth. Yet HSBC points to Dubai's previous track record of dealing with difficult periods of the Middle East's history, and considers the case proven. Recent initiatives such as the Dubai Internet City, which HSBC estimates will bring another 75,000 high spending expatriates into Dubai, underlines this conclusion.

The HSBC advice is that the current far value of Emaar shares is Dhs41-57 against a market price of around Dhs21 at the time of writing this article. Given the backing of the Dubai Government, which is still a major shareholder in Emaar, and adds an aura of sovereign guarantee to this particular share, that could be pessimistic.

Perhaps the valuation of the nationals who live here is more in line with reality. And maybe two other factors should not be ignored as drivers to make the Emaar share price move out of its 12-month trading range.

For one thing, interest rates are on a falling trend, and that will help sales of Emaar Properties' developments on 99-year leases, as the buy or rent equation will shift towards buy. And for another global equity markets seem like poor places to put money right now, and real estate is an alternative asset class.

It may be that some investors are having to sell their Emaar shares to meet margin calls on investments that have gone wrong overseas. But that just makes this a buying opportunity for those with cash to invest. Undervalued shares do not usually stay undervalued for very long.