Merger talks between Abu Dhabi developers may start consolidation
Aldar Properties and Sorouh Real Estate’s talks about merging into a developer with US$15 billion in assets may spark consolidation among other UAE companies and push up real-estate shares.
“We will likely see a lot of market activity across real estate names in both Abu Dhabi and Dubai and this news will help the stocks in the short term,” said Sebastien Henin, who helps oversee US$100m at The National Investor in Abu Dhabi. “We should expect more mergers as the companies lead the way.”
The two builders, part of Abu Dhabi’s drive to remake itself into a tourism and business hub, set up a team to study a possible merger with the “blessing” of the emirate’s government, which owns stakes in both, according to a joint statement yesterday. The team will present a plan in the next three months. Aldar and Sorouh shares both soared 9.8 percent today to AED1.34, the highest intraday level since July 11, at 10:31am in Abu Dhabi.
The shares have rallied this year after oil-rich Abu Dhabi said it plans to resume stalled projects including branches of the Louvre and Guggenheim museums. The ADX Real Estate Index has surged 52 percent in 2012 after a 54 percent slump last year. Property prices in the emirate dropped by half since the market’s peak in 2008 as the global credit crisis forced banks to curb lending and speculators fled.
“The consolidation is something positive for the market in all sectors, not just real estate, but also financial,” said Yazan Abdeen, who helps oversee about US$250m as a fund manager at ING Investment Management in Dubai. “This is part of a confession the market is going through in realising the real quality of the assets.”
Aldar and Sorouh are leading a construction drive in the UAE capital, sparked by government projects and investment. Sorouh has been building thousands of homes, offices and retail spaces around canals and parks on Abu Dhabi’s Reem and Lulu islands. Aldar, also building thousands of homes and offices in Abu Dhabi, received AED36bn (US$9.8bn) in government support last year and sold assets including a Ferrari theme park to the state. The government also agreed to retire debt related to infrastructure on Yas Island.
The UAE property market is still fragile after residential real-estate prices in Dubai slumped more than 60 percent from a mid-2008 peak. Rents in Abu Dhabi will drop further in 2012 as property supply outstrips demand, according to real-estate consultant CB Richard Ellis Group. Nakheel, the builder of artificial islands off the coast of Dubai, escaped default with the help of an US$8.6bn bailout from the government.
“This is not a game changer for the real estate sector, as it remains depressed,” said The National Investor’s Henin.
Tamweel and Islamic lender Amlak provided almost 90 percent of all mortgages in the U.A.E. before the market slumped starting in 2009. Tamweel resumed lending for the first time since October 2008 after Dubai Islamic Bank raised its stake in 2010 to help support the mortgage market. Emirates NBD, the UAE’s biggest lender by assets, last year took over unprofitable Dubai Bank, which was rescued by Dubai’s government in May after loan losses increased.
The merger talks are “a strong move to consolidate on the extra capacity that both companies have, so that should be good news,” said Mostafa El-Maghraby, an analyst at Kuwait-based Global Investment House. “A lot is still not clear, so it is difficult to say if this will be good for shareholders.”
Aldar shares surged 46 percent so far this year after the stock tumbled 60 percent in 2011. Sorouh has risen 58 percent in 2012 after losing 48 percent last year. That compares with an 8.6 percent rise in Abu Dhabi’s ADX General Index so far this year. In Dubai, real-estate companies including Arabtec Holding Co. and Emaar Properties led a 1.4 percent rally in the benchmark DFM General Index today, with the companies rising 5.1 percent and 3.3 percent respectively.
Aldar had assets of AED40bn at the end of last year and Sorouh had AED14bn. Aldar posted a full-year profit that beat analyst estimates after a year-earlier loss. Sorouh’s 2011 profit surged to AED334.7m from AED7.44m as rental and housing income rose.
Aldar this month had its outlook raised to “positive” from “negative” at Moody’s Investors Service. The company has a market value of AED5.47bn while Sorouh’s is AED3.52bn.
“This will make perfect sense,” Haissam Arabi, chief executive officer of Gulfmena Investments, said by phone yesterday. “I don’t see a reason for two mega, master developers with similar business propositions or offerings to remain separate.”