Union Properties still remains in a vicious financing cycle despite profit increase

Rise at Dubai's third-largest developer comes from handover of properties in its MotorCity project.

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At first glance, a property company reporting higher earnings in this climate is reason to celebrate. But on closer inspection, Union Properties is far from out of the woods. Dubai's third-largest developer yesterday reported a first-quarter increase in net profit to Dh50 million, from Dh30m for the same period last year.

The rise was largely due to the handover of properties in its MotorCity project, a 353 hectare development in Dubai that includes homes, offices and a race track. The stock jumped 6.8 per cent to Dh0.49. Analysts were less impressed by the results, noting that by aggressively reporting deliveries this quarter, the company eats away at what it can claim in coming quarters. Union also did not release details on default rates, an indicator that analysts are watching closely to see how far through the downward part of its cycle the company seems to be.

For these reasons, UBS maintained a "sell" rating on Union and Nomura stayed at "reduce". Judging by book value, Union trades at a discount of about 60 per cent to its peer group, according to UBS. There is good reason for this: the company remains in a vicious financing cycle. After MotorCity, the company has few projects in the pipeline that are nearing delivery. It is selling some assets, including the Ritz-Carlton Dubai, but that money is largely needed to finance its existing debt. The market for external financing is similarly bleak.

While several of its competitors have sovereign support, Union's back-stop is Emirates NBD, which owns a 30 per cent stake in the company. But the bank is dealing with its own challenges related to its heavy exposure to Dubai World's debt. The best solution for Union may be consolidation. The obvious merger candidate is Emaar Properties, which is owned by the Investment Corporation of Dubai (ICD). ICD also holds a 30 per cent stake in Emirates NBD, giving the investment company an indirect stake in Union.

Without that lifeline, it is hard to see Union Properties delivering much more good news in the short term. halsayegh@thenational.ae