Analysis: Shares of Union Properties are rallying after a long lull, but real test in 2 years

Analysts told Zawya that the heralded start of UPP’s turnaround should be viewed with cautious optimism

Bhavik Metha, Zawya, March 22, 2024

Dubai real-estate company Union Properties (UPP) has announced its long-awaited turnaround in its annual results. But the real test will come within the next two years as it competes with new housing supply due for handover from some of the emirate’s larger developers.

UPP’s share price rallied from its February 14 low of AED 0.27 ($0.07) to reach AED 0.40 this week.

Union Properties has had its “fair share of troubles” in recent years, Vikas Lakhwani, Chief Revenue Officer, CPT Markets, said. In addition to accumulated losses, in 2021 the then chairman and board members were dismissed amid accusations of involvement in financial irregularities and agreed to pay a settlement of $168.8 million.

A DFM disclosure last month showed the settlement issue was not over, as the subjects had failed to pay, and, the company had been unable to possess and sell real-estate assets as agreed.

A director’s report published with financial results last week nonetheless cited a “robust foundation and strategic vision”, saying the company is well positioned to play a significant role in Dubai’s real-estate sector.

However, auditors Grant Thornton drew attention to accumulated losses of AED 2.1 billion and liabilities exceeding assets by AED 263 million.

Operating profit reached AED 101 million, up from AED 10 million in 2022, but borrowing costs rose to AED 114 million from AED 74.8 million in 2022 as rising interest rates in 2023 took a bite from the company’s comprehensive income, which rose to AED 837.6 million in 2023, up from AED 29.98 million.

However, with the Federal Reserve expected to impose three rate cuts this year, and GCC banks likely to follow suit, interest rates are likely to fall, easing borrowing costs, said Lakhwani.

Leaders in Dubai real estate

Major developers including Dubai Financial Market–listed Emaar as well as Damac and Nakheel, which has announced a merger with Meydan, are among those that continue to deliver residential communities, and new developers have entered the market since the COVID-19 pandemic, said one analyst.

According to Lakhwani, UAE real estate is working “on a different level”, with prices rising, while other countries have seen them stagnate or fall.

A Dubai residential market review by Knight Frank at the end of last year said Dubai was a market once hindered by oversupply, but there are 13,000 homes to be delivered per year over the next six years, which the review regarded as “undersupply” against projected population growth.

But Lakhwani said new developers have entered the market from India and Pakistan and Saudi Arabia and seen projects sell swiftly.

Major players including Emaar, Damac and Nakheel have huge projects scheduled for delivery starting in 2025, with more to come in 2026 and 2027, and Lakhwani added that it would be “interesting” to see what happened once those properties start to reach the ready market in the next two years.

“The off-plan market is enjoying this ride,” he said, “but what we need to see, once they are ready to move in, are the real tenants.”

Geopolitical tensions elsewhere have seen real-estate investors “park money” in Dubai, buying multiple properties, with property sales and rentals prices rising, he said, but time will tell if they find tenants when construction is complete.

New investors in UPP

UPP has found new investors, Lakhwani said, with net cash from investing activities more than doubling to AED 243.5 million in 2023.

“They are trying to restructure the whole debt structure, but an increase in their revenue will help the company raise more funds through public and private debt,” he said. “For them to settle these huge losses, they need that inflow, they need that new investors’ money to recycle everything and put that in the right manner.”

Bhavik Metha, Deputy Head of Research, Investment Products, Century Financial, said that UPP is diversified, with 14 subsidiaries including Dubai Autodrome LLC and Al Etihad Education, which could protect it if the real-estate market falls.

A settlement with Dubailand and Emirates NBD allowing it to develop land originally intended for a theme park was another factor in its favour, adding “big potential” to both top and bottom line, he said.

Hani Abuagla, Senior Market Analyst at XTB MENA, recommended both caution and optimism.

“The company’s strategic five-year plan and its subsidiaries’ strong performance underscore its potential to overcome current financial burdens,” he said. “Moreover, an anticipated ease in borrowing costs could further mitigate finance-related concerns, enhancing UPP’s debt management capabilities.”

Other companies such as Damac Properties and Deyaar Development have incurred significant losses and share-value drops in the past, Abuagla said; however, operations restructuring and improving debt management have helped improve the financial picture over the years.

Source

Zawya