Ratings agency Fitch has warned that Dubai’s real estate sector could face a ‘double-dip’ contraction, and that the sector is likely to remain under pressure until at least 2012/13.
In a note released Sunday, the ratings firm said the outlook for the sector remained negative, and said that corporates may face “significant” refinancing risks given upcoming debt maturities in 2011/12.
“Despite signs that conditions may be stabilising, as well as a recent round of debt restructurings and extensions, Fitch believes that the credit outlook for the sector remains negative,” said Bashar Al Natoor, director of Fitch’s EMEA Corporates team in Dubai.
“The sector is likely to see a period of stagnant growth at best, and a ‘double-dip’ contraction at worst,” he added.
Fitch said it expects Dubai’s real estate and construction fundamentals to continue weakening, with increasing customer delinquencies, limited liquidity, and a continued historical reliance on short-term maturities. Oversupply, limited mortgage availability and rising interest rates will also pose significant constraints for real estate companies and buyers, it said.
The note also warned that without significant improvement in market conditions, sizeable disposals or additional equity raising, and significant government support, it is unlikely that developers will deleverage quickly enough to repay the upcoming 2011/2012 maturities from internal resources.
“The availability and the cost of debt for Dubai, and subsequently the corporate sector, is also likely to deteriorate and result in investors demanding higher risk premiums,” the note said. “This trend is already being reflected in credit default swaps, which have increased in the GCC states, with Dubai being the worst affected.”
Fitch said that it expects Dubai market rents to continue to decline for the next 12 to 18 months, while a weak residential, office and retail environment has caused developers to reduce rents to prevent tenant defaults