UAE real estate developers are expected to prioritise preserving cash in view of the ongoing Middle East conflict, according to top ratings agency Fitch, indicating scaled-back expansion, project launches and land acquisitions.
Fitch stated that buyer interest had already dropped and that overseas demand is likely to be subdued. But the sector is not facing any imminent financial risk despite a potential sales decline, as Fitch said that developers have substantial contractual backlogs that can guarantee future income.
"UAE homebuilders are likely to prioritise cash conservation following the geopolitical shock in the Middle East," the agency noted.
"Immediate viewings have fallen, although the contractual backlog of pre-sales and purchasers’ escrowed cash should provide stability in the near term."
Some UAE homebuilders procure pre-sales for projects, while others build first. For the former, which the Fitch-rated portfolio focuses on, purchasers contribute the agreed purchase price to escrow accounts and, upon construction milestones, this cash is released to the builder, said the top ratings agency.
The completion of existing near-term projects is therefore likely if substantially pre-sold already. Fitch believes that the more agile construction companies will mostly complete projects on time and on budget despite likely construction supply disruptions, it stated.
Fitch analyses homebuilders assuming that escrowed cash is only available for completed capex, and does not net it against their existing debt. These entities are not heavily leveraged, with net debt/EBITDA of 2x–4x for their ‘BB-‘ to ‘B+’ ratings. The focus will now be on the feasibility of those future projects where debt is raised as seed capital, and where average selling prices may have reduced.
As for projects that are already substantially pre-sold, developers are likely to deliver them, as funds for these are already sitting in protected escrow accounts.
When it comes to completion dates, delays are likely not expected from agile companies despite supply chain disruptions.
However, when it comes to future project launches, developers are expected to scrutinise their plans because average selling prices may drop and the debt needed to start them is now riskier.
"The completion of existing near-term projects is … likely if substantially pre-sold already… The more agile construction companies will mostly complete projects on time and on budget despite likely construction supply disruptions."
Fitch said capturing profit is now less important for developers than ensuring liquidity for the group. This means they will likely pull back on buying new land, which usually costs 20% of a project’s end-value, or other major investment commitments.
And since ensuring liquidity is now a priority, players in the real estate market are also expected to scale back overseas forays or plans to expand into other neighbouring markets like Saudi Arabia, Oman or Kuwait.-TradeArabia News Service
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