Hospitality 'overcapacity' risk for Emaar in Dubai

Emaar Properties’ hospitality and retail activities are providing it with a strong buffer against market volatility, although the risk of overcapacity hangs over the company, according to Moody’s Investors Service.

The ratings agency has issued its latest report on the company, in which it notes that tourism growth and political stability has underpinned Emaar's recurring revenue expansion.

However, it is urging investors to be cautious, warning in a release for the report that “market exuberance runs the risk of overcapacity”.

"Emaar's pre-sales model and construction-linked payment plan mitigates development risk, while its hospitality and retail assets provide a cushion against market volatility", said Rehan Akbar, Moody's analyst and author of the report.

"However, there is a risk that the company embarks on a significant multi-year capital spending plan in the current market up-cycle to not only launch new developments but also expand its hospitality and retail assets at a time when competitors are increasingly becoming active in these sectors, which could create overcapacity."

Moody's notes that footfall at Dubai Mall has witnessed compound annual growth rates of 25% since 2009, while Dubai's hospitality sector in 2013 recorded the highest profitability within the Middle East and North Africa for the fourth consecutive year.

Its investment grade rating to Emaar Malls Group reflects its view that Emaar's retail subsidiary will remain fairly strong in a scenario of sluggish domestic economic growth.

In the first quarter of 2014, revenues from Emaar Properties’ hospitality and leisure business were up 16% year-on-year, with the company's flagship Address Hotels and Resorts delivering strong occupancy figures.

The division recorded revenues of AED483 million (US $132 million) during the period, representing over 21% per cent of the company’s total revenue.