Earnings for real estate companies to contract by 20% - Markaz study

M.R.Raghu and Venkateshwaran Ramadoss, the authors of the report, note that the earnings of Real Estate (RE) companies in GCC is likely to contract by 20% in FY 2009.

The report studies the macro picture of the contraction in earnings and market value of GCC companies and observes that while earnings contracted by 42% in 2008 compared to 2007, the market value has contracted by 44% from Q1-08 to date and points to the similarity of the corporate earnings structure to the US market in terms of the share of financial companies in the total earnings during the build up to the recession in H1-07 when financial services accounted for 45% of the total corporate earnings.

Earnings of RE companies, which contracted by 31% YoY in FY-08, fared better than the overall earnings (-42%) while Market value of RE companies contracted by 59% from Q1-08 till date, more than the overall fall of 44%.

The report then zooms in to study the historical earnings and price performance of the RE companies in the region and observes that the contraction in both the earnings and market value bottomed in Q4-08 and is in the stable territories now.

The report adds that the earnings of Kuwait RE companies was at a negative $842m during Q4-08, the quarter of peak negative earnings and it fared worse than the RE companies in the much doomed Dubai which stood at a negative $671m and that Kuwait companies were the only ones to post a loss for the year 2008. RE companies in Kuwait are predominantly investment companies which had exposure to other GCC countries and hence had an earnings trend which resembles the contraction in property values across the region.

In market value terms, the contraction experienced by Abu Dhabi RE companies to the extent of 72% of Q1-08 levels, stands more close to Dubai RE companies which suffered a 80% contraction while the earnings of Abu Dhabi companies were comparable to Qatar RE companies which contracted only by 49% during the same period. This was mainly due to the financing woes which are slowly disappearing now and hence, the report suggests a faster recovery for these companies because of better sector fundamentals.

Market value has recovered in Q1-09 compared to Q4-08 and Qatar leads the recovery followed by Abu Dhabi and Kuwait. The report zooms further and studies the major value erosions and observes that Emaar Properties alone accounted for c.20% of the total market value erosion of GCC RE companies and five companies accounted for nearly 50% of the total market value erosions.

Estimating the trend in earnings of the GCC RE companies at this juncture can be very difficult and the report relies on the analysts estimates, including Markaz's. The companies for which an earnings estimate are available represent 92% of the total earnings in FY-08 and 49% of the current market cap of all RE companies in the region even though it is limited to 9 of the total 60 real estate companies in the region.

The report thus considers the trends in earnings of these companies to be a perfect sample of the market. These companies represent, 100% of companies listed in Dubai, 93% of Abu Dhabi, 62% of Qatar 58% of Bahrain 32% of KSA and 0% for Kuwait.

The report also notes that, the year on year growth in Emaar's earnings is not to be included for trend assessment as its 2008 earnings is subject to restatement on account of a change in the accounting policy for revenue and earnings recognition.