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With strong demand coming in, Omniyat’s inaugural dollar sukuk issuance was upsized to $500 million from $400 million, indicating investor confidence in both the issuer and the depth of liquidity availabe for Islamic debt.
With books at $1.8 billion, Omniyat was able to tighten pricing from the initial high 8% area to 8.375% -- deemed fair within the relative pecking order of UAE real estate companies.
“The pricing for Omniyat’s sukuk was on point or slightly tight. Despite being 3.5 times oversubscribed with a $1.8 billion order book, the issuance is still trading around 100, indicating that there hasn't been a significant improvement in price. This suggests that the pricing was fair and did not leave much room for immediate price appreciation,” said Fady Gendy, a fixed-income money manager at Arqaam Capital Ltd. in Dubai.
He pointed out that Damac Properties, an established luxury property developer, with its strong track record of financial discipline and resilience during negative market cycles, sees its debt trade at tighter yields compared to newer or smaller developers like Omniyat and Sobha.
In any event, compared with issuers in other sectors, a higher coupon rate is required from the UAE’s real estate developers to compensate for the risks associated with exposure to the emirates’ high-end market. Fitch Ratings has assigned an expected rating of 'BB-' to Omniyat's sukuk, indicating a speculative grade with a moderate risk of default
The developer focuses on the ultra-luxury segment, targeting high-net-worth individuals migrating to Dubai.
“This segment may be more resilient to general market cycles but also presents a concentration risk,” said Gendy.
Omniyat has a large pipeline of projects with the funds from the sukuk issuance utilised to support its growth plans.
According to Gendy: “The Dubai real estate market currently has strong metrics, with positive momentum in property sales and home prices. Issuing now allows Omniyat to capitalise on favorable market conditions before any potential decline due to global growth slowdown or lower oil prices.”
The timing also gives Omniyat an advantage before the market becomes crowded with other real estate issuances. Other local companies like Sobha Realty and Azizi Developments are also rumored to come to market soon.
Preferred asset class
The appetite for sukuk is high, among both Islamic and conventional asset managers. In addition, real estate is a preferred asset class among investors in the Middle East due to its familiarity and historical significance.
“In the hunt for yields, asset managers have started looking beyond the established players like Damac, Emaar etc. to the likes of you know Binghatti Properties, Sobha Realty, and even Arabian Centers,” a regional asset manager told Zawya.
Despite the risk premium that real estate developers have to pay--given that they don’t put up a collateral--there are several advantages for them to raise debt than to take bank loans. Issuing sukuk and bonds allow developers to diversify their funding sources, which is particularly beneficial if they have hit their borrowing limits with banks. This diversification also helps preserve bank liquidity for a rainy day.
Gendy said sukuk and bonds could have less restrictive covenants attached to them. “Typically, the language in docs on the sukuk and bonds may be less tight, less onerous than what issuers would see with bank lending, so that's another advantage.”
A third advantage for debt issuers is that sukuk and bonds can offer longer-term borrowing options that are typically not available through bank loans.
“For example, investment-grade developers like Emaar Properties and Aldar Properties can issue debt with longer tenors of seven to ten years, which would be more challenging to secure from banks.”
(Writing by Brinda Darasha; editing by Seban Scaria)
