Fitch: Credit outlook remains broadly stable for GCC property and construction issuers

In the GCC, demand for construction and property is falling across the region, and access to finance remains difficult.

"The negative impact could be most severe in Dubai, as the residential and commercial property market is subject to increasing customer delinquencies and an ongoing shortage of liquidity. Conversely, in Saudi Arabia, the downturn in the property market is likely to be less severe, as demand still currently outstrips supply and is likely to be sustained by the local population, as opposed to the more volatile demand levels from Dubai's largely expatriate population,"

says Bashar Al Natoor, Director in Fitch's Industrials group.

As a result of the downturn, the agency notes that M&A transactions are an increasing possibility for strategic and opportunistic purposes for GCC corporates in the construction and property sector. Qatar Real Estate Investment Company Q.S.C. (Alaqaria) (BBB+, Stable) and Barwa Real Estate Company Q.S.C are currently in merger discussions.

In Dubai, Dubai Holding Commercial Operations Group LLC (DHCOG, A+, Stable) is in merger talks with Emaar Properties PJSC (Emaar). Fitch is closely monitoring developments on these companies and will evaluate the impact of any changes on the issuers' ratings.

Russia's property market downturn, which started in late 2008, is expected to continue through 2009, driven by Russian GDP declines, rationed financing for property buyers; stagnant investor activity; and negative sentiment. Both volumes and prices are expected to continue falling, and Fitch estimates prices will decrease by 20%-40% in 2009 depending on region and sector.

As Fitch highlighted in its 4 June 2009 Special Report 'Liquidity Focus: Russia/Ukraine Construction and Property', liquidity in the sector remains extremely weak , whilst longer-term funding through bond issuance (international or domestic) is currently not a viable option due to lack of investor appetite, leaving issuers with limited options.

Julian Crush, Senior Director in Fitch's Industrials group said, "Fitch believes outright defaults have only been avoided to date because of the actions of creditors, who appear reluctant to push developers into default, possibly due to below-average recovery prospects and an uncertain Russian legal regime."

Conditions in the Ukrainian real estate market and rating dynamics are similarly negative. Fitch expects trading to remain very difficult during 2009 and into 2010, given the problematic macroeconomic conditions facing Ukraine (Fitch forecasts Ukrainian GDP will contract by 10% in 2009).

Recent rating actions in the sector include: Feb 2009 - Mirax Group Holding BV downgraded to 'C', Rating Watch Negative on debt restructuring, April 2009 - JSC Sistema-Hals outlook changed to 'B' Rating Watch Evolving due to possible change of majority ownership.

The full mid-year EMEA Industrials outlook update report will be published during the week commencing 20 July.