Consultant

S&P Global upgrades DAMAC rating as developer returns to growth

Ratings agency upgrades Dubai-based developer to B+ off the back of returning to growth and deleveraging

Dubai-based developer DAMAC Properties has been upgraded to B+ by S&P Global Ratings off the back of the real estate company returning to growth and deleveraging.

In a report, the ratings agency said that record high presales of AED7.8 billion in 2021, and new project launches will support DAMAC’s return to growth in 2022, after several years of revenue and EBITDA declines.

Furthermore, it anticipates the repayment of the USD$344 million outstanding on its sukuk, which is due in April, using its large unrestricted cash balances. This would be done while sustaining comfortable liquidity and a net cash position this year, it added.

“We therefore raised our rating on DAMAC to ‘B+’ from ‘B’,” the report said. “The positive outlook indicates that we could raise the rating by another notch in the coming six to 12 months if DAMAC demonstrates an improvement in its market position, including steady revenue growth and stronger profitability.”

The real estate developer also delivered 7,400 property units last year, with most of its projects launched in 2016-2017 nearing completion, while deliveries in 2020 that were delayed by the pandemic were handed over in 2021.

“We expect 2022 to be equally strong because demand hasn’t abated in the first quarter, and will likely remain healthy in the rest of the year. In addition, we understand DAMAC is scheduled to hand over more than 5,000 units in 2022, which will support growth after several years of revenue and EBITDA declines. Moreover, for the first time since 2016-2017, DAMAC has launched two new projects, including Cavalli tower in Marina and a new villa master development, Lagoons,” the report said.

“In view of supportive market conditions, we think DAMAC may launch more projects this year, since its inventory is being rapidly depleted due to high demand. We believe the company’s market share in primary real estate shrank in previous years in the absence of new projects, while other developers continued to add to the already abundant residential supply in Dubai. We expect that DAMAC can regain some market share, reinforce its solid market position, and invigorate its brand equity, thanks to recent launches, which are already around 50% presold.”

Therefore, S&P Global said that the positive outlook indicated the possibility of a one-notch upgrade over the next 12 months. However, it also warned that it could revise the outlook to stable if there was a significant drop in demand for real estate in Dubai, which could lead to a notable reduction in DAMAC’s presales and softening of prices due to supply overhang, which would threaten growth prospects.

“For a ‘BB-‘ rating, we would expect DAMAC to demonstrate sustained growth on the back of strong

demand, EBITDA margins improving to at least 15%-20%, and strong operating cash flow generation in 2022. This would be supported by high working capital inflow of estimated $500 million, which would provide a comfortable liquidity cushion ahead of expected increasing outlays for new projects from 2023. Equally, we would expect the company to sustain at least adequate liquidity and a prudent dividend distribution policy that would not lead to higher leverage,” the report concluded.

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