Cash flow generation of Dubai property developers will continue to benefit from healthy presales and favourable payment terms while a predicted stable growth of the real estate sector will support steady profitability and improving credit metrics in 2023, market pundits say.
Analysts at S&P Global Ratings argue that given the high number of new property launches in 2021-22, which they expect to continue in 2023, and assuming a three- to five-year lead time, working capital requirements will remain high. However, scheduled handover payments will support cash flow from 2024.
“We expect continued deleveraging and improving rating headroom for Dubai-based real estate companies in 2023. We also expect ample liquidity and limited funding needs,” says Tatjana Lescova, associate director GCC Corporate at S&P Global.
“Plentiful cash flow leaves headroom for higher capital expenditure, dividends, or acquisitions or coworking spaces to disrupt the market, as demand is healthy, but downsizing risk persists growth will support strong cash flow, steady profitability, and improving credit metrics,” Lescova adds.
According to various projections, Dubai’s GDP will expand by about three per cent in 2023, with modest annual inflation of about three per cent, while the population will grow by three to four per cent. High oil prices will sustain positive investor sentiment in the GCC region, while international tourism will continue to recover from its 2020 trough.
Analysts at S&P believe that residential real estate prices would stabilise in 2023 with demand cooling amid mounting economic pressures globally — including rising interest rates, inflation, and the devaluation of emerging currencies.
“Developers will benefit from good revenue visibility for the next couple of years, thanks to their robust revenue backlogs following strong presales in 2021-22. Operators will benefit from rising footfall and a growing number of international visitors, but face the risk of reduced spending due to economic headwinds. Rents will remain under pressure due to new supply,” says Sapna Jagtiani, director and lead analyst, Middle East Corporate of S&P Global.
As new deliveries should remain high, at about 40,000 units in 2023, Dubai’s residential real estate will continue to see relatively healthy demand and price stabilisation. Developers’ revenue growth will mainly come from new and recent sales.
“We don’t expect significant changes in mortgage transactions, as interest rates will remain high, but the market is largely cash-based and hence has limited sensitivity to interest rates,” Jagtiani said.
Dubai remains attractive compared to other major international hubs, as residential prices are still below peak levels, although they are catching up. Despite the positive overall trend, Dubai’s real estate sector remains volatile and driven by sentiment, S&P analysts said.
Retail real estate will see rents remain under pressure due to gross leasable area (GLA) additions and inflationary pressures that could weaken discretionary spending, affecting tenants’ sales.
“Footfall will improve thanks to tourism and population growth. Competition from online retail will mount, but Dubai’s extreme heat will maintain the need for indoor commerce as a lifestyle option. Mall operators will enhance their omni-channel presence and offer more entertainment,” S&P Global said in its report.
Hospitality will find ongoing support from the recovery in tourism, but new additions will sustain oversupply and limit expansion of ADRs. Rising competition from other GCC countries, mainly Saudi Arabia and Qatar, will not affect Dubai as a well-established hub in the short term.
Dubai remains one of the most well-connected cities globally. Offices will benefit from the new business flowing into Dubai, further reducing vacancy rates, as planned GLA additions for 2023 are limited. Prime locations will see more rent increases, said the report.