Fitch: Dubai Real Estate corporates face major refinancing risks

"Despite signs that conditions may be stabilising, as well as a recent round of debt restructurings and extensions, Fitch believes that the credit outlook for the sector remains negative," says Bashar Al Natoor, Director in Fitch's EMEA Corporates team, Dubai. "The sector is likely to see a period of stagnant growth at best, and a 'double-dip' contraction at worst," Al Natoor added.

Without a significant improvement in market conditions, sizeable disposals or additional equity raising, and significant government support, it is unlikely that developers will deleverage quickly enough to repay the upcoming 2011/2012 maturities from internal resources.

Whilst the world economy now slowly begins to recover from recession, Fitch expects Dubai's real estate and construction fundamentals to continue weakening, with increasing customer delinquencies, limited liquidity, and a continued historical reliance on short-term maturities. Oversupply, limited mortgage availability and rising interest rates will also pose significant constraints for real estate companies and buyers.

The availability and the cost of debt for Dubai, and subsequently the corporate sector, is also likely to deteriorate and result in investors demanding higher risk premiums. This trend is already being reflected in credit default swaps, which have increased in the GCC states, with Dubai being the worst affected.

Fitch also notes The Land Department in Dubai's new 'Tayseer' initiative, announced on 10 July 2010. This is a Dubai government real estate project rating initiative. Tayseer qualified projects should meet a required criteria to be classified as 'tier one' and the UAE's leading financial institutions will now join the exclusive list of bankers authorized to offer funding to Tayseer 'tier one' rated Dubai real estate projects. Fitch also notes that Dubai will be offering Government guarantee, through the Land Department, for Tayseer qualified projects. The agency will continue monitoring this new development and, upon receiving more details, will asses its impact as it could enhance liquidity and transparency in the real estate sector.

Fitch expects Dubai market rents to continue to decline for the next 12 to 18 months. A weak residential, office and retail environment has caused developers to reduce rents to prevent tenant defaults. Weak demand has led to a substantial decrease in developer earnings, cash flows and asset values, and in turn created covenant problems and liquidity pressures. This has severely impacted some of the industry's largest players, such as Dubai Holding Commercial Operations Group LLC's (DHCOG; 'B+'/RWN) and, more severely, has forced Dubai World to restructure their debt.