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Abu Dhabi’s Merged Aldar Sorouh Properties Rated Buy at Arqaam

Aldar Sorouh Properties, the company to be created through the merger of Abu Dhabi’s two largest developers, was rated buy at Arqaam Capital.

The price target for the shares was set at 2.50 dirhams, Dubai-based analysts led by Mohammad Kamal wrote in a March 7 note to clients. Abu Dhabi’s Aldar Properties PJSC and Sorouh Real Estate PJSC said on March 3 their merger will become effective in June, creating the Middle East’s third-largest publicly traded developer.

“We believe the market is not fully pricing in the impact of the merger on balance sheets” and “is overestimating leverage risk inherent in standalone businesses,” the analysts wrote. “We see 77 percent in upside potential” in value creation from monetizing land and long-term development value.

Abu Dhabi is trying to revive its real estate market after values fell by more than 50 percent since the global credit crisis in 2008. The merger has been blessed by Abu Dhabi’s government which in 2011 bailed out Aldar with $9.8 billion.

Arqaam expects a “prolonged weakness in prices and rents over the next 12 to 18 months” as Abu Dhabi’s residential market is supplied with the wrong product. High-end properties are 27 percent oversupplied while the mid-to-low end market is still facing a shortage of around 35 percent, according to the report.

“Developers have only just begun prioritizing fundamental market needs over higher-margin luxury product,” Kamal wrote. Mid- to lower-end supply will not be in the pipeline before the second half of 2014, he wrote. Abu Dhabi needs around 61,000 homes in the mid and low markets, the report estimates.

Average rental rates have declined 11 percent on annual basis to around 120,000 dirhams for a two-bedroom apartments, Kamal wrote. Rents may fall by 8 percent to 10 percent in the coming year, according to the report.

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