Emaar rethinks IPO strategy

12 June 2017

Proceeds from Emaar property development unit’s share float will supplement Emirates Airlines royalty payments

Emaar Properties, the UAE’s biggest real estate developer by market value, is looking to sell shares in its UAE Real Estate development business, in a deal that is roughly the size of its $1.58bn shopping malls subsidiary float in 2014.

Emaar will offer up to 30 per cent of its real estate development arm through an initial public offering (IPO) on the Dubai Financial Market (DFM), subject to market conditions, but its chairman Mohamed Alabbar says the transaction will be completed in the fourth quarter of this year.

The funds raised from the IPO will be distributed among the company’s shareholders as a special dividend – the primary beneficiary in this case will be Investment Corporation of Dubai (ICD), the main sovereign wealth fund of the emirate, which owns about 30 per cent of Emaar.

Emaar’s property development business has performed well over the years. Sales increased from AED4.2bn ($ 1.14) in 2012 to AED14.4bn in 2016 and its total backlog – the value of properties sold but where related revenues have yet to be recognised – stands at AED40bn at the end of May 2017.

Emaar says that the decision to list the unit was a result of an internal review of its asset and the IPO will enhance Emaar’s own overall valuation as investors will properly recognise the true potential of property development business on the bourse.

The market was surprised by Emaar’s announcement on 7 June, just a couple of days after Saudi Arabia, the UAE and Bahrain along with Egypt severed diplomatic ties with Qatar, triggering one of the worst political spat between the members of GCC economic bloc.

Although, equity market observers agree that there is a business case for listing any of the units of Emaar as a standalone entity but they say that the listing announcement at the height of political volatility in the GCC is driven primarily by the need to generate cash for ICD.

Even Alabbar in March had said that there were no plans to list any of its subsidiaries and the company’s priority was streamlining the business and creating synergies. His comments came when he was asked at a public forum if Emaar was planning to launch the IPO of its hospitality unit amid lacklustre markets and persistently low oil prices.

Market sources argue that the ICD’s need for cash has pushed Emaar to rethink its IPO strategy and fill in the gap created by absence of a dividend from Emirates Airlines this year.

The Dubai-based airline, which was among the fastest growing carriers in the world for the better part of the last 10 years, has struggled to maintain profit growth due to travel restriction in the US, the currency exchange woes in Africa and terror attacks that have cut down travel demand globally. Emirates had paid AED 2.6 billion ($700m) to ICD as royalty for financial year 2014-15, followed by a $681m payment in 2015-16. The airline managed to post a profit but did not to pay royalties to ICD for financial year 2015-16.

ICD’s cash flows have to be substituted from somewhere and proceeds from Emaar’s property development business listing could bridge the gap, according to an equity market source. Whether Emaar will be able to follow the fourth-quarter deadline, given the current soft market conditions, is another matter altogether, he adds.

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