Union Properties, one of Dubai's largest developers, is exploring its legal options after Morgan Stanley issued a report last week that gave the company a negative rating and helped send its shares tumbling 15 per cent in a week. Morgan Stanley said in its report that Dubai property values could decline by as much as 10 per cent by 2010, and came down negatively on Union Properties and Deyaar, another Dubai-based developer.
Union Properties sent a complaint on Sunday to the Emirates Securities and Commodities Authority (Esca), to ask whether it had any legal recourse, said Zaid Ghoul, the chief financial officer. Esca is the regulator of the Dubai Financial Market, where Union Property's shares are listed. "We have notified [Esca] officially of our disagreement and the negative effect it has had on our share price and the fact that the analysts have not discussed this with us," he said. "We don't know what sort of action Esca is going to take. There is no clear law where we can have a case."
The US investment bank put a price target on Union stock of Dh5.7 (US$1.5), below the targets of most analysts. The stock currently trades at Dh4.49 per share, having fallen from a recent high of Dh5.66 on July 24. Management had not been consulted by Morgan Stanley researchers, Mr Ghoul said, even though the analysts gave negative reviews to executives. He disputed the notion that Dubai property prices were poised to decline, as the report asserted. A price decline could be on the cards for luxury high-rise apartments, he added, but not for office space and low-rise apartments. He also questioned the Morgan Stanley report's method of valuing the company.
Union was expecting a response from Esca today, Mr Ghoul said. A spokesman from Morgan Stanley said the bank would not comment on the issue. Earlier this year, Esca proposed that analysts operating in the UAE be licensed. The proposal was controversial because it appeared to give companies the right to review analyst reports before they were published, and banned negative research that was deemed not fully supported by evidence. That proposal has not gone into effect, however, and it is not clear that it would even apply in this case. Morgan Stanley operates on an international basis, with its UAE base located at the Dubai International Financial Centre, where Esca does not hold sway.
Meanwhile, Union Properties also said yesterday that it was looking to raise US$1 billion (Dh3.67bn) this year to help finance construction of a Formula One theme park and nearby retail space in Dubai Motor City, which is under construction. "We are talking to local and international banks to structure the right deal," Mr Ghoul said. "We don't know if it's going to be Islamic or conventional." Union is in talks with Emirates NBD, the company's largest shareholder, as well as with Goldman Sachs, Deutsche Bank and UBS to find the cheapest and most appropriate method of financing, he added. Options range from a syndicated bank loan to a convertible bond or a sukuk, an Islamic bond.
Whichever vehicle the company chooses, securing financing at a good price could be tricky. Global credit markets are tight, which could scuttle attempts to tap banks in developed countries for their cheaper rates. And a bond that is convertible into shares of stock is not likely to be well received at a time when Union's share price is plunging. It has fallen roughly 15 per cent in a week amid a region-wide equities sell-off which has also pushed Emaar, the largest Arab developer, down 18 per cent since June, to close yesterday at Dh9.60 per share.
Nevertheless, analysts say Union is not likely to have trouble raising the money. "I don't see why they shouldn't get it," said Majid Azzam, a property analyst at HSBC. "We have seen many companies get financing recently, and the rates haven't been very high. Sorouh issued Dh4bn recently, and Aldar issued $1bn in bonds. Availability of funding doesn't seem to be an issue". Much of the funding will go towards the "F1-X" theme park in Dubai, a racetrack with exhibits and rides scheduled to open next year. The theme park, part of the company's massive MotorCity project off Emirates Road near the Barshaa section of Dubai, is under construction.
Mr Ghoul said that despite the decline in its stock price and the negative Morgan Stanley report, Union's portfolio of properties and balance sheet was strong. The company expects profits of Dh850m to Dh900m this year, a revision upwards from an initial estimate of Dh800m, he said. The company recently announced second-quarter net profits of Dh317.7m, up 106 per cent from the year before and higher than analysts expected.
"I believe a combination of factors is causing the meltdown," Mr Ghoul said. "I don't see any reason why Emaar would break 10 dirhams [per share], or why Union would lose 18 per cent in three days aside from people getting hit by bad sentiment." @Email:afitch@thenational.ae
