Emaar Q3 profits down as diversification backfires and costs rise

The Dubai based developer of the world’s tallest building, Emaar Properties has posted lower than expected profits for the third quarter reflecting a tougher business environment across its diversified portfolio and the mounting inventory of property in Dubai.

Profits of $167 million for the quarter were down seven per cent on a year ago. But Emaar’s balance sheet likely looks miles better than anything else in the Dubai property sector which is still reeling from a two-year recession since the global financial crisis that has left prices down by 50 per cent, empty inventory and city littered with half-built projects.

Empty tower

The lights of the Burj Khalifa, the world’s tallest building, tell the story at night. According to some reports around 800 of the 900 apartments in the tower are empty, and unless residents are living in the dark the lack of lights at night does tend to confirm it.

But the immediate cause of the Emaar profit decline was a doubling of costs to $475 million, while revenues were up just five per cent at $755 million. Analysts thought this was due to higher running costs for Emaar’s expanding hotel chain that now includes the Armani Hotel in the Burj Khalifa, and its shopping malls.

There was also a $20 million impairment reported but not identified that analysts assume must be its subsidiary Emaar Economic City in Saudi Arabia. However, they are more concerned about Emaar’s 45 per cent stake in the troubled Islamic home loan company Amlak whose $1 billion loan and development portfolio has not been revalued to reflect falling property prices.

Emmar-MGF

The company said recently that its cash flow was not hit by a penalty against the group’s joint venture with MGF in India and the scandal surrounding the alleged problems with the construction of the Commonwealth Games Village. But this could impact the timing and size of the long-delayed Emaar-MGF IPO.

Emaar said it has delivered 45 per cent of units in Burj Khalifa. Rents for the same units have tumbled 40 per cent since June while capital values are 70 per cent down from the 2008 peak due to oversupply.

But a testament to the strength of Emaar Properties among Dubai developers came last month when the group raised a $500 million convertible bond to refinance short-term debt.

Emaar remains a bellwether stock on the Dubai Financial Market and one keenly watched by the ArabianMoney investment newsletter (click here to sign up). We only give buy and sell recommendations in this newsletter, not on this website.