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Arqaam says it is a buy for company created by Aldar and Sorouh merger

AldarSorouh Properties, the company to be created through the merger of Abu  Dhabi's two largest developers, was rated buy at Arqaam Capital.

The price target for the shares was set at Dh2.50, Dubai-based analysts led  by Mohammad Kamal wrote in a March 7 note to clients. Abu Dhabi's Aldar Properties  and Sorouh Real  Estate said on March 3 their merger will become effective in June, creating  the Middle East's third-largest publicly traded developer.

"We believe the market is not fully pricing in the impact of the merger on  balance sheets" and "is overestimating leverage risk inherent in standalone  businesses," the analysts wrote. "We see 77 percent in upside potential" in  value creation from monetizing land and long-term development value.

Abu Dhabi is trying to revive its real estate market after values fell by  more than 50 per cent since the global credit crisis in 2008. The merger has  been blessed by Abu Dhabi's government which in 2011 bailed out Aldar with  US$9.8 billion.

Arqaam expects a "prolonged weakness in prices and rents over the next 12 to  18 months" as Abu Dhabi's residential market is supplied with the wrong product.  High-end properties are 27 per cent oversupplied while the mid-to-low end market  is still facing a shortage of around 35 per cent, according to the report.

"Developers have only just begun prioritizing fundamental market needs over  higher-margin luxury product," Mr Kamal wrote. Mid- to lower-end supply will not  be in the pipeline before the second half of 2014, he wrote. Abu Dhabi needs  around 61,000 homes in the mid and low markets, the report estimates.

Average rental rates have declined 11 per cent on annual basis to around  120,000 dirhams for a two-bedroom apartments, Mr Kamal wrote. Rents may fall by  8 per cent to 10 per cent in the coming year, according to the report.


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