Emaar Islamic bonds to extend rally on UAE visa rule

UAE last week approved extension of visa for real estate investors from six months to three years
ISLAMIC BOND Emaar’s sukuk may extend their rally after the UAE relaxed visa rules for homebuyers to attract investment (Bloomberg Images)
By Bloomberg
Thu 07 Jul 2011 06:21 PM

Emaar Properties’s sukuk may extend their rally after the UAE relaxed visa rules for homebuyers to attract investment to the Middle East’s worst-performing property market, said Mashreq Capital DIFC Ltd and EFG-Hermes Holding SAE.

The yield on the 8.5 percent Islamic notes due August 2016 slid 18 basis points, or 0.18 percentage point, to 7.14 percent on Thursday since the government passed a resolution on June 28 extending the visa period. The rate on the bonds from the Dubai- based developer of the world’s tallest tower, the Burj Khalifa, may decline as much 70 basis points, according to Mashreq Capital.

The federal government agreed to lengthen the visa period to three years from six months to “enhance the attractiveness of the real estate sector.” Property prices in Dubai, the second largest of the seven sheikhdoms in the UAE, have dropped 64 percent from their peak in mid-2008, Deutsche Bank AG said in a June 9 note to investors. In neighbouring Abu Dhabi, prices fell 55 percent, according to Dubai-based Rasmala Investment Bank Ltd.

“The announcement is potentially positive for the real estate sector in Dubai, and Emaar is a major player in that sector,” Abdul Kadir Hussain, chief executive officer at Mashreq Capital in Dubai, who helps oversee $2bn in fixed- income assets, said in an interview July 5. “The sukuk will probably tighten.”

About 85 percent of the UAE’s population are foreign nationals and require visas to live and work in the country. Emaar, 31 percent owned by the Dubai government, is the nation’s biggest developer by market value.

The UAE’s visa extension plan will “significantly enhance investor confidence and drive the growth of the country’s property sector,” Emaar chairman Mohammed Alabbar said in a statement e-mailed on June 29. The government shortened the period to six months from five years in May 2009, sparking criticism from homebuyers and investors.

The Dubai Financial Market Real Estate Index, a measure that includes the shares of five developers, rallied 3.5 percent since June 28. Abu Dhabi’s ADX Real Estate Index, which tracks three real-estate companies, increased 5 percent in the same period.

The Dubai government’s 2002 decision to allow foreigners to own homes helped make the emirate the world’s fastest-growing real-estate market until its collapse in 2008. Former England team captain David Beckham, former Formula 1 driver Ralf Schumacher and singer Rod Stewart boosted the sheikhdom’s profile when they became owners of villas on palm-shaped islands off its coast.

Dubai government’s 6.396 percent Islamic bonds maturing November 2014 yielded 4.73 percent today, down 24 basis points since June 28. The yield on state-controlled ports operator DP World Ltd’s 6.25 percent sukuk due July 2017 declined 24 basis points to 5.52 percent today, the data show. Emaar’s bonds yielded 161 basis points more than DP World.

Emaar’s “sukuk is still one of the cheaper securities in the entire Dubai complex, so it still offers a relatively decent yield compared to everything,” Mashreq’s Hussain said.

Nida Raza, senior vice president of capital markets at Bahrain’s Unicorn Investment Bank BSC, said the bonds are unlikely to rally further because the visa amendments have already been priced in.

“There’s not much trading in the sukuk,” Raza said in a phone interview from Manama on July 5. “If investors wanted to get exposure to Emaar, the best way to do it is through the equity market.”

The developer’s shares have gained 3.7 percent since June 28 to 3.07 dirhams today. Dubai’s DFM General Index advanced 3 percent in the period, while Abu Dhabi’s ADX General Index jumped 0.2 percent.

The government damped housing demand in 2009, when it shortened the visa duration, set a minimum property price of AED1m ($272,000) and required holders to leave the country and return for renewals, Citigroup Inc. said June 29. The U.A.E. also charged AED2,000 for new visas.

In last week’s announcement, the UAE didn’t say whether the other visa requirements imposed in 2009 would be changed.

The visa amendment will benefit expatriates who are looking for homes in the UAE after fleeing unrest that swept the Middle East and North Africa, said Rawad Hakme, co-manager of fixed-income allocation at the Dubai unit of Egyptian investment bank EFG-Hermes Holding SAE. The UAE, Qatar, Kuwait and Saudi Arabia were spared violent demonstrations that unseated leaders in Egypt and Tunisia.

The difference in yield between the Dubai’s Sharia-compliant notes and Malaysia’s 3.928 Islamic bonds widened 12 basis points to 216 today. Average yields on sukuk from the six- nation Gulf Cooperation Council fell less than one basis point to a five-year low of 4.15 percent on July 5, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index show.

The extra yield investors demand to hold the debt over the London interbank offered rate widened two basis points to 244 on July 5.

Sukuk from the GCC returned 6.8 percent so far this year, while the Bloomberg Malaysian Sukuk Ex-MYR Index, which measures foreign-currency Islamic debt sold by companies in Malaysia, gained 5 percent. Bonds in developing markets rose 5.2 percent, JPMorgan Chase & Co’s EMBI Global index shows.

Abu Dhabi-based developers Sorouh Real Estate Co and Aldar Properties PJSC may also get a boost from the visa regulations, Hakme said. The yield on Aldar’s 5.767 percent dollar sukuk maturing November 2011 declined seven basis points since June 28 to 4.55 percent today, according to Bloomberg prices.

“The new regulation is effectively a three-year residency for them,” Hakme said in an e-mailed response to questions on July 5, referring to foreigners who left countries affected by the protests. “All real-estate players are set to benefit, directly or indirectly, from this decision.”

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