Yield on developer's $500m bonds tumbled 26 basis points.
Emaar Properties bond yields fell the most in four months after the builder of the world's tallest skyscraper regained an investment grade rating for the first time since 2009 as the Dubai property market rebounds.
The yield on Emaar's $500 million of Islamic bonds due July 2019 tumbled 26 basis points, the biggest drop since September, to 4.4 per cent on Wednesday, according to data compiled by Bloomberg. Standard & Poor's raised Emaar's rating on Wednesday by one level to BBB-, the developer's first investment-grade since December 2009 amid a decline in Dubai property prices following the global credit crisis.
Real estate companies in Dubai are benefiting from an economic recovery and a rebound in construction as the Gulf business hub prepares to host the World Expo in 2020 with spending of $8 billion on infrastructure projects. Emaar plans Spanish-style villas, a leisure and shopping development near Dubai's new airport and apartments near the world's tallest skyscraper. Home prices may jump as much as 40 per cent this year, the emirate's Land Department said.
"The upgrade will mean that more investors will be able to trade Emaar again, and that will boost demand and increase liquidity," Tariq Qaqish, who oversees the equivalent of $136 million as head of asset management at Dubai-based Al Mal Capital, said by phone on Wednesday. "Agencies will adjust their ratings across the board in the UAE because of the strong recovery in the country, led by real estate and financial markets."
Since Dubai won the right to host the 2020 world fair on November 27, the emirate's stock index has advanced 34 per cent to February 5. The yield on the government's $650 million sukuk maturing May 2022 fell 28 basis points to 4.51 per cent. That compares with a one basis-point increase in the average yield of sukuk from the Middle East, according to JPMorgan Chase & Co indexes. Emaar's 2019 sukuk yield fell 34 basis points.
Property and constructions companies are benefiting from the resurgence. Union Properties' full-year profit jumped nine-fold, while Deyaar Development's quadrupled. Emaar, which is more than 30 per cent owned by the Dubai government, may report a 13 per cent increase in 2013 profit, according to the mean estimate of 13 analysts.
"Ultimately Emaar was investment grade in all but name, and to some extent the market has priced in the credit improvement," said Yaser Abushaban, the executive director for asset management at Dubai-based Emirates Investment Bank. The upgrade "opened the debt up to investment grade managers who couldn't buy before, which created a new wave of demand. But the immediate moves could be as much as we'll see at this point in time," he said.
While Emaar benefits from Dubai's new boom, it has sometimes struggled abroad. Its Indian joint venture in June received notice of a Rs86 billion ($1.38 billion) fine for violating foreign exchange rules. Shares in Emaar gained 3.8 per cent this year to February 5, after more than doubling in 2013.
UPP jumped 50 per cent and Deyaar climbed 30 per cent since the start of the year. The shares gained 4.7 per cent on Thursday.
The current environment makes it a good time to consider spinning off Emaar's retail operation into a separate company to increase investor returns, Chairman Mohamed Alabbar said in November.
Visitors to Emaar's Dubai Mall climbed to 75 million in 2013, compared with 65 million the year before, the company said in a statement last month. Growth in Dubai is set to average 4.6 per cent a year between 2012 and 2015, more than twice the rate of the previous four years, according to government forecasts.
Emaar's risk profile improved following the presale of properties, increase in recurring income and after it converted bonds valued at $475.7 million into shares, S&P said. The company has $2.5 billion of debt outstanding, including a $500 million Islamic bond maturing in August 2016. The yield fell 24 basis points on Wednesday to 2.84 per cent.
"At those yields, I think there will be more contractions," Al Mal's Qaqish said.