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Island-raffler’s debt sparks Dubai concern

File - Monday, May 26, 2014, shows abra taxi boats leaving their station in Bur Dubai to take passengers to Deira in Dubai, United Arab Emirates. (AP Photo/Kamran Jebreili)

DUBAI: Islamic bonds from Damac Real Estate Development Ltd. have become the region’s worst performers this year just three months after they were issued, amid concern Dubai’s property boom is running out of steam.

The developer, which once raffled a Caribbean island in a bid to sell more luxury apartments, was last month caught up in a selloff led by property securities that sent the local equity gauge into a bear market. The yield on Damac’s 2019 sukuk jumped 69 basis points to 5.87 percent in June, according to data compiled by Bloomberg, compared with the 10 basis-point increase to 4.17 percent for Middle East Islamic bonds on a JPMorgan Chase & Co. index. The securities have traded below their selling price since they were sold in April.

“The market is assigning an added risk to Damac because its business model is based on pure property sales without any rental income, which is very risky,” Taher Safieddine, an analyst at Shuaa Capital PSC, said by telephone. “Now they are doing brilliantly because they have a lot of handover, but once that is done, earnings may take a beating because there is no other source of income.”

The International Monetary Fund, Moody’s Investors Service and the United Arab Emirates central bank have all cautioned in recent weeks that the country’s real estate market, particularly in Dubai, may be overheating. The last property crash in the emirate wiped as much as 65 percent off values, and triggered a series of near defaults that roiled markets from Seoul to New York, from which the sheikhdom is still recovering.

While Damac’s initial pricing for the sukuk was in the mid-300 basis-point mark verses midswaps, it narrowed to 310 basis points by the time it sold the debt. Damac’s $650 million sukuk has lost investors 1.3 percent this year through last week, according to data compiled by Bloomberg. That’s the worst of all Islamic bonds from the six-nation Gulf Cooperation Council, which returned an average 4.1 percent.

“Damac’s sukuk priced on the expensive side,” Richard Segal, a London-based international credit strategist at Jefferies International Ltd., said by phone July 9. “If sentiment changes in the real-estate industry, investors judge them among the entities most likely to suffer.”

Real estate prices are either close to or match pre-crisis levels in 2008, Moody’s said in a July 8 report. The IMF said this month that Dubai’s successful bid to host the World Expo 2020, and its planned $8 billion spend before the event, could trigger a decline in real estate prices if not implemented prudently.

The emirate is considering regulations to limit the sale of properties before they are built, the fund said.

The measures from Dubai would be welcomed by the industry and may help assuage investor concerns, Doug Bitcon, a Dubai-based fund manager at Rasmala Investment Bank Ltd., said by phone July 9. Meanwhile some of the volatility it displays is down to its BB credit rating with Standard & Poor’s, two levels below investment grade, which means many Islamic institutions aren’t able to hold the credit, he said.

Damac’s sukuk was more than four-times oversubscribed when it was listed on NASDAQ Dubai, according to Niall McLoughlin, the developer’s vice president of corporate communications.

“The current price presents a significant investment opportunity given current interest rates, the predicted growth in Dubai tourism and the investment being made in infrastructure throughout the emirate,” he said Sunday. Damac’s sukuk yield fell one basis point Monday to 5.8 percent at 12:03 p.m. in the emirate.

Dubai’s economy may grow 4.7 percent this year, Mohammad Lahouel, chief economist for the Dubai Department of Economic Development, said in March. The emirate’s gross domestic product expanded 4.6 percent last year, government data show.

Last month’s stock market declines echoed what happened in 2008, when the sheikhdom’s gauge plummeted 72 percent. Dubai entities that had borrowed billions to help turn it into the Middle East’s business and financial hub saw credit dry up, bringing the emirate to a near default in 2009.

 
A version of this article appeared in the print edition of The Daily Star on July 15, 2014, on page 5.

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