The main drivers for the downgrade are seen as the massive oversupply of properties,expected price falls of up to 70% and prospects of widespread defaults.
Property prices in Dubai have nosedived since September 2008, when the effects of the US-triggered world financial crisis and falling crude prices caught up with the property boom in Persian Gulf sheikhdoms.
The UBS research note, released on Tuesday, goes on to say: "We believe the recent run up in equities with positive global market sentiment, U.A.E. government bailout as a backdrop is unsustainable,… We don't yet see fundamentals improving, hence we view overall systematic risk as mispriced."
With many of the migrant workers and experts leaving the emirates due to rocketing unemployment, exploitation and maltreatment, the UBS report foresees a population drop of up to 10%, further reducing demand for residential properties leading to a sector vacancy rate of up to 30% by the end of 2010.
As a result, the UBS report forecasts the average house price to fall to as much as 500 UAE dirhams ($136.1) per square foot ($1465 per square meter) from a peak of AED1850 ($503.6) in the fourth quarter of 2008.
And the worst may be yet to come, the Swiss investment bank believes. Its note says: "In our view we are still in relatively early stages of the property down cycle in the U.A.E.,… We believe risk-reward profiles are not yet compelling for investors to consider market reentry hence continued price declines are expected."
According to UBS, although property prices have already fallen by an average of 25% to about AED1400 ($381.1) per square foot ($4,102.1 per square meter),the spiral is likely to continue.
"In our view we are still in relatively early stages of the property down cycle in the UAE," the research note said. "We believe risk-reward profiles are not yet compelling for investors to consider market reentry hence continued price declines are expected."
As a result, although share prices in Emaar Properties, Dubai's Union Properties and Abu Dhabi's Aldar Properties rose by 33%, 40% and 84% respectively over the past month, UBS downgraded Emaar and Union Properties to sell, from neutral rating and Aldar to neutral, from buy.
The property freefall has forced major developers to put the brakes on major projects, in order to survive the current crisis.
The Swiss bank believes that some $300 billion worth of projects, or 60-70%, of new projects have been either delayed or canceled altogether.
The note explains: “With ramping job losses and loan-to-values of various properties rising above 100%, implying negative equity, we believe mortgage default rates will pick up over the coming quarters, potentially in the mid to high single digit range.”
UBS said that Dubai has a total of $112 billion in liabilities, which include a $42 billion cost to finish all residential properties.
Last year, the sheikhdom had an exposure to mortgages equal to about $30 billion, and the Swiss bank forecasts a higher figure next year.
"With ramping job losses and loan-to-values of various properties rising above 100%, implying negative equity, we believe mortgage default rates will pick up over the coming quarters, potentially in the mid to high single digit range," it said.
This follows an earlier statement by UBS which forecast a default of up to $25 billion by investors and home buyers in the emirates for part-completed properties.
In a February 15 interview, the Dubai-based UBS real estate and construction analyst Saud Masud said: “We believe delinquencies on payment terms will be a growing concern over the next few years…. In our view investors are and will continue to default as per individual risk profile.”
AAM/RE
