Dubai Property Market 2023 Tatjana Lescova

Associate Director
GCC Corporates
Demand Should Hold Up Against Global Economic Pressures
March 10, 2023

This report does not constitute a rating action

Contents Key Takeaways 3

Rated Entities 4

2022 Highlights 5

2023 Dubai Economic Outlook 7

Outlook By Subsegment 8

2023 Risk Factors 10

Profitability 11

Cash Flows 12

2
Key Takeaways
• The outlook for rated Dubai-based real estate companies is
stable, reflecting our expectation that growth will support Dubai’s macroeconomic drivers
strong cash flow, steady profitability, and improving credit
GDP growth Population growth CPI
metrics.
15
• Dubai's GDP will expand by about 3% in 2023, with modest
annual inflation of about 3%, while the population will grow by
3%-4%. High oil prices will sustain positive investor sentiment in 10
the Gulf Cooperation Council (GCC) region, while international
tourism will continue to recover from its 2020 trough. 5
• Mounting economic pressures globally--including rising interest
rates, inflation, and the devaluation of emerging currencies-- 0

%
may cool the demand for residential real estate. This will lead
residential real estate prices to stabilize in 2023.
-5
• Developers will benefit from good revenue visibility for the next
couple of years, thanks to their robust revenue backlogs
following strong presales in 2021-2022. -10

• Operators will benefit from rising footfall and a growing number

of international visitors, but face the risk of reduced spending -15
due to economic headwinds. Rents will remain under pressure

2023f

2025f
2012

2013

2014

2015

2020

2021

2022f
2016

2017

2018

2019

2024f
due to new supply.
CPI--Consumer Price Index. f--Forecast. Source: S&P Global Ratings, Dubai Statistics Center.

3
 2023 | Outlooks Are Mostly Stable After Several Upgrades

Excellent
Rated Dubai-based companies
• UAE dirham (AED) 36 billion in cumulative
debt
Strong
• 25%-30% of debt is floating rate
• 9x average EBITDA interest coverage
Majid Al
Business risk profile

Satisfactory Futtaim
BBB/Stable/A-2
gcAA/--/gcA-1+ Rating actions in 2022-2023
Emaar Emaar Damac
Fair Properties Malls
BBB-/Stable BBB-/Stable B+/Positive in March 2022
BB-/Stable in June 2022
Weak Damac
BB-/Positive BB-/Positive in February 2023
Emaar Properties
Vulnerable
BBB-/Stable in June 2022

Highly Aggressive Significant Intermediate Modest Minimal

Emaar Malls
leveraged
BBB-/Stable in June 2022
Financial risk profile

4
2022 Highlights | Growth Across All Real Estate Segments
Residential real estate
Number of sales transactions and prices
• Close to a 45% increase in the number of transactions (sales, mortgages, Mortgages* Sales*
and gifts), with a 76.5% increase in value to AED528 billion. Off-plan Transactions, y-o-y* (right scale) Residential price index change, y-o-y (right scale)

property sales made up an estimated 45% of transactions (40% in 2021). 100 100
75 75
• Strong interest from international buyers, who continued to flock to

Thousands
50 +68% 50
Dubai, thanks to its reputation as a low-tax, investor-friendly jurisdiction

%
25 25
and a safe-haven for conflict-exposed regions and for buyers and
0 0
investors from emerging markets facing currency depreciation.
-25 -25
• Double-digit price increases of 18% on average for villas and 16% for

2020

2021

2022
2012

2013

2014

2015

2016

2017

2018

2019

Jan.-Feb.

Jan.-Feb.
2023
2022
apartments. Rental rates accelerated compared to 2021, up 23% for villas
and 19% for apartments.
*Excluding buildings and land. y-o-y--year on year. Sources: Dubai Land Department, ValuStrat.
• A fall in mortgage transactions to about 17% of total transactions (24%
average in 2015-2021), and to about 34% of the total transaction value
(over 50%). Retail GLA and rental rates
Retail real estate GLA at year-end
GLA growth (right scale)
GLA additions
Average rental rates growth, y-o-y (right scale)

• A slower rental decline of -1% in 2022, with positive traction for higher-

Square meters (mil.)

7.5 15
5.0 10
quality assets, supported by higher tenant sales than in 2019 for rated 2.5 5
issuers. 0.0 0

%
-2.5 -5
• Footfall approaching or exceeding pre-pandemic levels, supported by -5.0 -10
tourists and visitors to international events. -7.5 -15
-10.0 -20
• New gross leasable area (GLA) of 200,000 square meters (up 4.5%),

Q3 2020

Q3 2022
Q1 2020

Q4 2020

Q3 2021
Q1 2021

Q4 2021

Q1 2022

Q4 2022
2016

2017

2018

2019

Q2 2020

Q2 2021

Q2 2022

2023f
largely down to the Dubai Hills Mall opening in February 2022, which had
reached 91% occupancy by December 2022.
Sources: Dubai Land Department, JLL, Asteco. GLA--Gross leasable area. f--Forecast. Source: JLL.

5
2022 Highlights | Growth Across All Real Estate Segments
Hospitality Dubai hotel performance
• A doubling in international visitors versus 2021, to over 14 million, boosted Number of keys Key additions ADRs ($) Occupancy, YTD Nov. (right scale)
by the Dubai Expo and the World Cup in Qatar. Most visitors came from 200 90
the GCC region (21%), Western Europe (21%), and South Asia (17%). 70
150

Thousands
• A strong rebound in average daily rates (ADRs) and improved occupancy 50
to 73% versus 67% in 2021, still below the pre-pandemic level. 100

%
30
• New hotel openings, which increased the number of hotel keys by 6% to 50
10
148,000.
0 -10
2016 2017 2018 2019 2020 2021 2022 2023f

Note: August 2020 data are not available. ADRs--Average daily rates. YTD--Year to date. f--Forecast. Sources: JLL, STR Global
(November-end).

Offices
• An increase in rents for the first time since 2016, of 7% on average, or
Office performance
GLA GLA additions Office rental rate growth, y-o-y (right scale)
double digits in prime locations.
10 20
• An 11% vacancy rate in prime locations, down from 19% in 2021, supported

Square meters (mil.)

by new business registrations and limited new office space. 5 10

• A boost from a 2021 law allowing full foreign ownership of mainland 0 0

%
companies, as well as from new visa rules.
Sources: Dubai Land Department, JLL, Asteco, STR Global. -5 -10

-10 -20
2016 2017 2018 2019 2020 2021 2022 2023f

f--Forecast. GLA--Gross leasable area. y-o-y--Year on year. Sources: Asteco (Dubai average rental rates), JLL (Grade A CBD
GLA).

6
2023 Outlook | Dubai’s Economic Prospects Will Be Supportive

Dubai will show resilience, but won't escape global economic

Global economic trends remain uncertain in 2023 headwinds due to its open economy
GDP Global GDP growth of 2.2%, with a shallow recession in the U.S. in About 3% GDP growth in 2023, a slowdown from 2022, in line with
first-half 2023. Close to 5% growth in China and no growth in other GCC countries. Dubai plans to double GDP in 10 years.
Europe.
Inflation High inflation of 5.7% in the eurozone and 4.3% in the U.S. Average inflation of about 3% in 2023, hence less pressure on
consumer spending.

Population Global population growth of just below 1%. Population growth of 3%-4%, supported by government initiatives
and Dubai's attractiveness as a place to live and do business,
despite the introduction of corporate tax in June 2023.
Interest rates A hike in the U.S. policy rate to above 5% in first-half 2023, The UAE Central Bank’s practice of matching rate hikes in the U.S.
remaining there in 2024.

Geopolitical Uncertainty around the consequences of geopolitical tensions, A boost to consumer sentiment, spending, and real estate
risks including for energy and raw material prices. transactions from high oil prices.

Currency Depreciation of emerging market currencies versus the U.S. dollar. The dirham's peg to the U.S. dollar, which provides currency stability
and an attractive hedging option for buyers and investors from
emerging markets.
Tourism An ongoing recovery in tourism, with pent-up demand from China. A rising number of international visitors (14.4 million in 2022, still 14%
below pre-pandemic levels). Dubai's hosting of international events
will sustain its prominence.

7
2023 Outlook | Overall Resilience But Risks Abound

Residential real estate will continue to see relatively healthy Sales prices and rents remain below their peaks, albeit with
demand and price stabilization as new deliveries should remain less of a gap
high, at about 40,000 units. Developers' revenue growth will Comparison with previous peak (%)
mainly come from new and recent sales. We don’t expect
significant changes in mortgage transactions, as interest rates As of Q3 2021 As of Q3 2022

will remain high, but the market is largely cash-based and hence 0
has limited sensitivity to interest rates. Dubai remains attractive -5
compared to other major international hubs, as residential prices
-10 -8
are still below peak levels, although they are catching up. Despite -10
the positive overall trend, we think that Dubai's real estate sector -15
-14
remains volatile and driven by sentiment. -20 -18

Retail real estate will see rents remain under pressure due to -25
-24 -25
GLA additions and inflationary pressures that could weaken -30
discretionary spending, affecting tenants' sales. Footfall will -30 -30 -31 -30
-35
improve thanks to tourism and population growth. Competition
from online retail will mount, but Dubai's extreme heat will -40
maintain the need for indoor commerce as a lifestyle option. Mall -41 -41
-45
operators will enhance their omni-channel presence and offer Villa prices Villa rentals Apartment Apartment Office rentals Hotel ADRs
(vs. 2014) (vs. 2014) prices rentals (vs. 2015) (vs. Nov.
more entertainment. (vs. 2014) (vs. 2014) 2015)

ADRs--Average daily rates. Sources: Asteco, JLL.

8
2023 Outlook | Overall Resilience But Risks Abound

Hospitality will find ongoing support from the recovery in tourism, Consistent capacity additions in previous years will limit the
but new additions will sustain oversupply and limit expansion of improvement
ADRs. Rising competition from other GCC countries, mainly Saudi Growth in new capacity additions (%)
Arabia and Qatar, will not affect Dubai as a well-established hub
in the short term. Dubai remains one of the most well-connected Residential units Retail GLA Office GLA Hotel keys
cities globally.
12

10
Offices will benefit from the new business flowing into Dubai,
8
further reducing vacancy rates, as planned GLA additions for
2023 are limited. Prime locations will see more rent increases. We
6
do not expect remote or hybrid work patterns or coworking
spaces to disrupt the market, as demand is healthy, but 4
downsizing risk persists.
2

-2
2016 2017 2018 2019 2020 2021 2022 2023f

GLA--Gross leasable area. f--Forecast. Source: JLL.

9
2023 Outlook | Developers And Operators' Risk Exposure Differs

Developers Operators
Inflation risks High exposure to raw material costs. This is a relatively low risk for in- Limited risks and high profitability, allowing operators to absorb higher
progress projects since construction is outsourced on fixed terms. For cost increases. Turnover indexation clauses in leases allow for partial
new projects, cost pass-through depends on supply and demand, which cost pass-through. Cost efficiency will remain important.
was favorable in 2021-2022, as double-digit sales price increases more
than offset cost inflation. We don’t expect margin pressure in 2023.
Recession risks High cyclicality. However, GDP and projected population growth in Dubai Lower sensitivity to cyclical troughs. In addition, the average lease life of
are supportive. Healthy order books following strong presales in 2021- three-to-four years in prime malls offers some revenue visibility. Offices
2022 have improved revenue visibility. have a longer average lease.
Competition Competition from existing developers and new players, such as Aldar Pressure on mall operators' rental rates and profitability from GLA
Properties. Many new projects in 2021-2023 will fuel oversupply in the additions.
next cyclical trough.
Land availability Limited availability of prime land, with most in the hands of government- Mall operators' focus on increasing their online presence.
related developers. Distressed developers or those with large land banks
can therefore monetize land at attractive values if needed.

Interest rate hikes Limited mortgage transactions. We therefore expect higher interest The potential for rising interest rates to dent consumers' purchasing
rates to have a limited effect on demand. Rated issuers have low power. Stable and high-margin mall leasing allows for better absorption
refinancing needs in 2023 and manageable exposure to floating-rate of funding costs.
debt.
Changing consumer A growing preference for larger spaces and villas. Villas command a Double-digit growth in online retail. However, bricks and mortar
behavior higher value per unit but require more land. As residential rents continue commerce remains essential due to the hot climate. Remote working is
to rise, the decision to rent or buy becomes more salient. more likely to lead to a hybrid office/homeworking pattern than disrupt
the market.

10
2023 Outlook | Profitability Is Improving Despite Rising Costs
Developers benefit from outsourcing construction on fixed Emaar Properties’ profitability
terms, with contractors bearing the raw material risk. Hence, Revenue Gross profit EBITDA EBITDA margin (right scale) Gross margin (right scale)

short-term risk on construction projects is low, although in the 8 60

medium term, contractors may try to renegotiate terms. We 7
50
estimate that price increases for new projects in Dubai by far 6
5
40

Bil. $
outpace construction cost inflation, as evident from improved 4 30

%
gross margins. We expect margins to remain strong in 2023, as 3
20
2
raw material pressures have subsided, and the price environment 1
10

is supportive. 0 0
2018 2019 2020 2021 2022
Note: All metrics are on an S&P Global Ratings-adjusted basis, except 2022. Source: Company report.

Real estate mall operators enjoy high margins that can

accommodate moderate cost rises. Most costs relate to staff Damac’s profitability
and services (maintenance, security, and facility management), Revenue Gross profit EBITDA EBITDA margin (right scale) Gross margin (right scale)

while energy costs remain insignificant. In 2022, some prime mall 2.0 40
operators were able to increase rents on lease renewal, partly 1.5 30
offsetting inflationary pressures. The strong rebound in tenant 1.0 20
sales and footfall has improved landlords' ability to increase rents

Bil. $
0.5 10

%
based on turnover. 0.0 0

-0.5 -10

-1.0 -20
2018 2019 2020 2021 9m 2022 RTM
Note: All metrics are on an S&P Global Ratings-adjusted basis. Source: Company report.

11
2023 Outlook | Cash Flow Will Be Positive For The Fourth Year Running
Developers’ cash flow generation will continue to benefit from Emaar Properties’ cash flow utilization
healthy presales and favorable payment terms, with residual Working capital CFO before working capital Capex Dividends Debt/EBITDA (right scale)

cash collections of about 20%-30% of the total on handover, 6 6

rather than the post-handover payment plans prevalent a few 4 4

years ago. 2 2

Bil. $
0 0

x
Given the high number of new property launches in 2021-2022, -2 -2

which we expect to continue in 2023, and assuming a three- to -4 -4

-6 -6
five-year lead time, working capital requirements will remain high. 2017 2018 2019 2020 2021 RTM 9M 2022
However, scheduled handover payments will support cash flow
Note: All metrics are on an S&P Global Ratings-adjusted basis. RTM--Rolling 12 months. CFO--Cash flow from operations.
from 2024. Capex--Capital expenditure. Source: S&P Global Ratings.

We expect continued deleveraging and improving rating

headroom for Dubai-based real estate companies in 2023. We Damac’s cash flow utilization
also expect ample liquidity and limited funding needs. Plentiful Working capital CFO before working capital Capex Dividends Debt/EBITDA (right scale)

cash flow leaves headroom for higher capital expenditure, 1.5 6.0
dividends, or acquisitions. 1.0 4.0
0.5 2.0

Bil. $
0.0 0.0

x
-0.5 -2.0
-1.0 -4.0
-1.5 -6.0
2017 2018 2019 2020 2021 Q3 2022

Note: All metrics are on an S&P Global Ratings-adjusted basis. Q3 2022 debt to EBITDA calculated using annualized EBITDA.
CFO--Cash flow from operations. Capex--Capital expenditure. Source: S&P Global Ratings.

12
Related Research

• GCC Corporate And Infrastructure Outlook 2023: Resilience Amid Slower Growth, March 7, 2023
• Industry Top Trends: Homebuilders and Developers, Jan. 23, 2023
• Industry Top Trends: Real Estate, Jan. 23, 2023
• Industry Top Trends: Transportation, Jan. 23, 2023

13
Analytical Contacts

Tatjana Lescova Sapna Jagtiani

Associate Director, GCC Corporates Director & Lead Analyst, Middle East Corporates

+971-4372-7151 +971-4372-7122

[email protected] [email protected]

14
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