Swiss bank Credit Suisse has reiterated a positive outlook for the UAE property sector, as it believes that real estate market will recover quickly from the current turmoil due to the country's solid macroeconomic fundamentals.

"As a result of a slowdown in economic growth and liquidity challenges in the GCC region, we downgrade our target prices for most real estate stocks in the UAE. However, we stay overweight on the sector as we believe the UAE real estate market will recover quickly from the current turmoil thanks to its solid macroeconomic fundamentals," the bank said in a report titled "Emea Real Estate Outlook 2009."

Although the negative news about the sustainability of the real estate market in Dubai has dominated the market for the past three months, it had a knock-on effect on the performance of Abu Dhabi real estate names.

The bank believes that there are three potential catalysts that should be monitored in the short term: Oil prices, which have a strong effect on the UAE's liquidity and hence the real estate market. Any sign of upside in oil prices would be viewed as positive news; bringing the real estate sector under the umbrella of the federal government, which is dominated by Abu Dhabi, thus ensuring the availability of liquidity; and positive news about the condition of the real estate market in Dubai.

"We believe that the market is discounting most of the negative newsflow about the lack of funding, shortage of mortgage availability and the fact that Dubai is a highly leveraged market in a global credit crisis. In our view, it even assigns a zero value for some projects in the pipeline for some UAE developers. We expect that developers will cut supply as demand deteriorates as a result of negative sentiment and the shortage of liquidity, which will in turn affect their forward NAV as they sell fewer units than expected."

Credit Suisse believes that both the Dubai and Abu Dhabi governments will play the most important role in determining the future of the UAE real estate market.

Both governments are taking effective steps in tackling demand and supply issues in the market, in our view. The Dubai government has established a committee to study the condition of the real estate market and to regulate supply and ensure the sustainability of demand. Meanwhile, Abu Dhabi is studying a new real estate law in order to regulate the market in the emirate.

"As the majority of supply, scheduled in the next three years, is controlled directly and indirectly by the government, primary developers in Dubai have announced their intention to control supply, as demand is decreasing owing to the difficulty of obtaining a mortgage. Several real estate projects in Dubai are now being postponed, especially recently announced projects that are still in the planning stage. We also expect Abu Dhabi developers to delay some forthcoming supply in the short term. Will the federal government step in?"

Credit Suisse believe that cutting supply to keep a sustainable level of demand will not be enough without an effective solution for financing problems in the UAE, especially on the demand side.

"We think that the UAE federal government (through sovereign funds) will have to play an active role in providing financing for both home buyers and developers, as the financing situation, especially in Dubai, is currently under pressure."

Government-controlled real estate developers, as well as banks, have already started to provide solutions; the latest announcement is the establishment of a new mortgage finance company in Abu Dhabi, the main shareholders of which are Aldar, Sorouh, Mubadala and Abu Dhabi Commercial Bank. The entity will start providing mortgages in Abu Dhabi and then will spread its services to Dubai and other emirates.

"We are confident that the Abu Dhabi government is still committed to financing development projects in the emirate and will provide the required support for those projects. However, we think the most important question is, will the federal government, which is dominated by Abu Dhabi, provide financial assistance to the real estate market in Dubai?

"We believe it is in the interests of the UAE that the Dubai market remains sustainable and think the federal government may step in to make sure that the real estate market in Dubai doesn't go into a deep slump because of the current shortage in liquidity. However, it is difficult to determine the form of this involvement. We also believe that there is likely to be some sort of consolidation among developers in both emirates, thus bringing the sector under the umbrella of the federal government in the future," Credit Suisse said.


Cut in target price of top firms

Credit Suisse has reduced target price for major real estate companies such as Sorouh Real Estate, Aldar Properties, Union Properties and Emaar Properties.

Although the bank upgraded Sorouh Real Estate from neutral to outperform, it reduced the target price from Dh7.2 to Dh6 per share.

It has reiterated outperform ratings for Aldar Properties and Union Properties, and has reduced target price from Dh14.4 to Dh12 a share and from Dh5 to Dh3.91a share, respectively.

The bank has maintained a neutral rating for Emaar Properties while cutting target price from Dh9.25 to Dh4.42/share.

"We are bullish on Aldar as the Abu Dhabi real estate market still looks attractive, mainly owing to undersupply and the influx of government funds into the sector to address the current gap between supply and demand (of which Aldar is the primary beneficiary)."

The bank maintains a cautious outlook on Emaar Properties, given that 48 per cent of its value is generated in the currently troubled Dubai market.

"We expect Emaar to downsize its project pipeline, and we also anticipate delays and slower sales of existing projects because of the credit challenges in Dubai, which may spread to Emaar's other international projects," the report said.