We value real estate stocks using an economic profit model where the key drivers are the stock’s rental value growth, property value growth, and development/acquisition profit. The sum of the discounted 5-year future economic profit provides the basis for our valuation.
 
For Dubai Residential, the key assumptions underpinning our AED1.45 target price are: 10% average EPS growth pa and 7% portfolio value growth pa 2025 through 2029 and an average weighted average cost of capital (WACC) of c11.8%.

The stock screens as High Risk in our quantitative model, but this is driven by its short trading history since IPO. We do not believe a High Risk rating is supported by the low leverage of the business thus limiting the businesses risk to the key downside risk amplifier in real estate; leverage. Furthermore our assessment is that real estate fundamentals for Dubai Residential are broadly positive currently, limiting downside risk and applying moderate upside risk, therefore a High Risk rating has not been applied.

We identify the following risks to the achievement of our target price:



Key upside risks to our target price are significantly higher than anticipated rental income growth, property value growth or acquisition gains from stronger than expected market fundamentals or management outperforming their business plan or our estimates. 


The key downside risk, in our view, is the next cyclical turning point and while the catalyst will be unknown and a shock, the effect is likely to cause rent decline and portfolio valuation decline, that could drag stock prices lower. Significantly lower than expected rental income is a downside risk from reasons including weaker demand for residential units, or greater than expected supply, management not delivering the business plan or weaker general macro-economic or higher geopolitical risk. Types of risk inherent to property include tenant risk, location risk, sector risk, planning risk, legal risk, taxation risk, structural risk, liquidity risk, development risk, valuation and pricing risk, and listed securities have in addition the risk inherent with stock markets. General economic risk, oil price risk and geopolitical risk is particularly topical in the Middle East currently.