Dubai – Mubasher: Standard and Poor’s Global Ratings (S&P) on Tuesday downgraded Damac Real Estate Development Limited’s, a subsidiary of Damac Properties, long-term issuer credit rating to “BB-“ instead of “BB” with a stable outlook.

The New York-based rating agency also lowered its issue rating to 'BB-' from 'BB' on the three sukuk trust certificates ($650 million with $270 million outstanding, $500 million, and $400 million) issued by Damac through three special purpose vehicles are Alpha Star Holding Ltd., Alpha Star Holding III Ltd., and Alpha Star Holding V Ltd.

S&P ascribed its downgrade move to a prediction of Damac’s weak credit metrics over the next two years as declining residential prices in Dubai, the US rating agency said in its report.

Such situation will lead to a decrease in Damac's presales, operating margins, and profitability, the report found.

“We now forecast the company's debt to [earnings before interest, tax, depreciation and amortization (EBITDA)] at 3.5x-4.0x and funds from operations (FFO) to debt at 20%-25% over the next two years, compared with our previous expectation of debt to EBITDA of less than 3.0x and FFO to debt of more than 30%,” S&P reported.

Damac’s financial risk is considered as significant rather than intermediate, according to the report.

The company’s presales fell 43% to $1.2 billion during the full-year 2018, compared to $2 billion in 2017, while revenues stood at $1.7 billion, against $2 billion in 2017.

“We believe prices could fall by another 5%-10% in 2019, almost reaching levels seen at the bottom of the last cycle in 2010. While we expect prices to stabilise in 2020, we don't anticipate a meaningful recovery in 2021,” S&P pointed out.

The Dubai residential real estate market is also projected to be far no better over 2019 than in 2018, with further expectations of prices stability in 2020.

“The stable outlook stems from Damac's success in securing significant presales and collections for its key projects in Dubai. We expect this will sustain earnings and cash flow generation over the coming two years, albeit at a much lower level than in the past,” the agency added.

The gradual decrease in property prices is reflected in Damac’s declining operating margins during 2017 and 2018, and it is forecast to be continued over 2019 and 2020.

However, Damac’s margins have been boosted by its success in presale and collections over the past few years, recording cumulative presales worth $2.8 billion during the year ended 31 December 2018.

“We could lower the rating if Damac is unable to maintain the financial ratios stated above. This could occur if Dubai's real estate market weakens more than we anticipated, resulting in larger margin depression than in our base case,” the statement added.