The UAE Stock Markets Are Proxy for the Real Estate Market

An expected 25% drop in Dubai property prices in 2008 could hit UAE bourses as early as the fourth quarter of this year and stocks could yield most of their gains from a mid-year rally.
Stock markets in Dubai and Abu Dhabi are poised to gain up to 25% from current levels to a third-quarter peak after a Gulf-wide crash erased nearly half of their value last year according the investment banks.
But the gains could be short-lived as a flood of new properties hitting Dubai's real estate market in 2008 creates an oversupply for the first time since the emirate opened up its property sector to foreign investment in 2002.
Investors tend to watch property prices when making equity investment decisions as companies accounting for 50% of the UAE's stock market capitalisation are directly linked to the real estate sector.
The UAE stock markets are a proxy for the real estate market. In the fourth quarter of 2007 people will start to get worried about the real estate market and see signs of a slowdown.
Abu Dhabi-based investment research house Prime Emirates estimated in August Dubai would have a surplus of 33,000 residential units in 2008.
Depending on the severity of the real estate market correction, we could see a substantial impact on the stock markets in the fourth-quarter of 2007 and in early 2008.
The real estate market may stabilise over 2007 but the downturn in 2008 to be around 25%."
Heavyweight Emaar Properties, the largest Arab property developer by market value, alone accounts for 40% of trading volumes of stock markets in the UAE, the second-largest Arab economy.
UAE markets trade at an average of 12 times forecast 2007 earnings and 10 times 2008 earnings, compared with 20 times a year ago. The benchmarks of Dubai and Abu Dhabi sank 44.4% and 42.3%, respectively, last year.
Stocks including Emaar, whose price-to-earnings ratio is 10.3 for 2007, is attracting foreign institutional investors for the first time.
The Gulf is clearly an untapped market and there is a lot of demand for exposure to this market among foreign institutions. The UAE market at its current level and with the robust underlying economy, will offer good opportunities.
But share ownership rules that place limits on foreign investment will prevent foreigners leading a recovery.
Emirates Telecommunications Corp, Abu Dhabi's largest company by market value, is trading at 11.3 times 2007 earnings, but foreigners are not allowed to buy the stock. A lot of foreign institutions are looking at the UAE market but they are more likely to provide support to the market on the downside than to drive a rally.