Dubai Expo Bet Spurs Property-Led Debt Rally: Islamic FinanceSamuel Potter
As spotless black sedans shuttled World Expo officials through Dubai’s streets last week, yields of Islamic bonds from local developers Emaar Properties PJSC and Nakheel PJSC dropped to record lows.
The declines underscored growing optimism that the Middle East business hub and second-richest member of the United Arab Emirates will be named as host of the 2020 event when members of the Bureau International des Expositions vote in Paris next month. Sukuk from Emaar, developer of the world’s tallest tower, and Nakheel, which built Dubai’s artificial palm-shaped island, are rising even as regional peers retreat.
“Real estate is the first sector to come to mind in terms of beneficiaries of a win,” Yaser Abushaban, executive director of asset management at Emirates Investment Bank PJSC, said by phone from Dubai Oct. 24. “It would have a positive impact on sentiment and pricing, and not just in construction and real estate. There could be a boom across economic sectors.”
Selection would be a milestone in Dubai’s recovery following the property crash that wiped 65 percent off values and a 2009 request to delay $25 billion of debt payments. Winning the right to host the Expo would prompt 26 billion dirhams ($7.1 billion) of infrastructure, HSBC Holdings Plc said in a Sept. 25 research note. Economic growth will receive a 0.5 percentage-point boost per year and about 2 percentage points in 2020, Bank of America Corp. said in a Sept. 26 report.
The yield on Nakheel’s sukuk due August 2016 fell to 7.16 percent at 4:23 p.m. in Dubai, bringing the drop this year to 210 basis points, according to data compiled by Bloomberg. The rate on Emaar’s bond due the same month tumbled to 3.47 percent, a decline of 94 basis points. That compares with a 110 basis-point increase to 4.28 percent on Oct. 25 for average corporate sukuk in the Gulf Cooperation Council, HSBC/Nasdaq Dubai indexes show.
“Emaar will benefit significantly by being strong in both hospitality and real estate,” Amol Shitole, a Bangalore, India-based credit analyst at SJ Seymour Services Pvt. Ltd., said by phone Oct. 23. “If Dubai wins the Expo, there will be further tightening of the yields on real estate credit.”
A delegation of representatives of the 167 member nations of the Bureau International des Expositions toured Dubai the week of Oct. 21 to assess its bid, visiting landmarks including Jebel Ali port and Burj Khalifa, the world’s tallest building. A decision is expected at the Bureau’s two-day meeting scheduled to begin Nov. 26.
A winning bid will speed up plans for a 5 billion-dirham expansion of the city’s metro network, Dubai’s Roads and Transport Authority said in June. A new purpose-built exhibition center with themed pavilions will be constructed in the desert south of the city, according to Dubai’s bid website.
Failure may bring a temporary halt to yield declines, according Montasser Khelifi, a Dubai-based senior manager for global markets at Quantum Investment Bank Ltd. Even if it wins, expenses, combined with about $42 billion of debt coming due in the next two years, could put pressure on Dubai’s borrowing costs, Jean-Michel Saliba, an economist at BofA in London, said in a note to clients on Sept. 26.
“If we don’t win, as with every piece of bad news, there may be a few days where we see a negative impact,” Khelifi said by phone Oct. 24. “But it will not affect the fundamentals, because Dubai is still growing with a solid and diversified economy.”
Property prices in Dubai, one of the seven United Arab Emirates, have recovered by about a third since reaching a bottom in 2011, according to Goldman Sachs Group Inc., after the 2008 crash. Nakheel wrote down its real estate by $21.4 billion from 2008 to mid-2010 and received an $8.6 billion bailout from Dubai’s government, helping it avoid default.
Emaar’s third-quarter profit climbed 50 percent to 581 million dirhams, the company said in a statement last week. The operator of the Dubai Mall, the world’s largest by area, will be among the biggest winners if the sheikhdom hosts the Expo, first as land values and construction increase and then as hotel and retail businesses expand, HSBC said.
“Dubai’s reputation will grow and the city will become more attractive to investors and expatriates,” Khelifi said.