SWOT Analysis

Figure 9: DAMAC Properties' SWOT Analysis

Source: (DAMAC Properties, n.d.)

Figure 9 illustrates the SWOT analysis of DAMAC Properties which is based on the information found about the company and the findings from the financial analysis conducted in this thesis.

Strengths

Strong Brand Image and Diversified Product Portfolio

DAMAC Properties has made quite a reputation in the real estate industry and not just in the local market but in some foreign markets as well, which includes GCC countries, Levant, Middle East and the United Kingdom, being known as a leading luxury property developer. In addition to this, it has recently added notable projects such as two world-class master-planned gold developments in its already diverse portfolio and collaborating with premium brands such as Fendi Casa, Versace Home and The Trump Organization. This proves that the company has a strong brand image in its relevant market (DAMAC Properties, n.d.).

Strong Liquidity Position

Based on the financial analysis, although DAMAC Properties’ profits have been continuously falling, the working capital analysis and current ratio still suggest that it has the capacity to convert its liquid assets to cash in order to meet its short-term financial obligations. Moreover,

STRENGTHS

solvency ratios such as debt-to-equity ratio and debt-to-assets ratio also suggest that it has the debt capacity to meet its current liabilities and at the same time raise finance through debt.

Design & Development Team Consists of Highly Skilled Professionals

Having highly skilled professionals does not only deliver a job well done with their expertise, but also boosts DAMAC Properties’ reputation, which ensures customers to receive premium quality products and services from the company. Hence, reassuring customer satisfaction.

Similarly, it also maximises productivity as it requires less additional trainings for the employees, which reduces the expenses for the company as well as the valuable time consumed for these trainings.

Weaknesses

Steep Hierarchy

The organisational structure of DAMAC Properties, which was illustrated in 2.1.3 – figure 3 reveals a steep, hierarchical structure. This is a weakness for the company because it intensifies the level of dependency due to the creation of bureaucracy which slows down the efficiency of the company as it reduces its responsiveness. Likewise, the system of methods and processes also becomes rigid due to this.

Highly Illiquid Asset

Development properties consisting of owned land held for future development, properties under development and completed properties held in inventory are highly illiquid assets.

Although it is a good investment for diversification purposes, it involves higher risks and longer lock-ups. Hence, repelling prospective investors to invest. Likewise, the high level of inventory of this asset may be due to the slow development of these properties; therefore, slowing down the recognition of revenue because advances from customers is being inhibited from conversion.

Luxury Pricing

With DAMAC Properties’ pricing, economical customers of the real estate market cross-off the company from their list as the real estate market tend to be full of property buyers who just prefer to discover a good bang for their buck rather than looking over luxurious properties. As a result, there is only a narrow customer base for the company.

Opportunities

Existing Demand on Foreign Markets

DAMAC Properties has been expanding its business operations internationally. This allows the company to gain access to new markets and widen its talent pools. Expanding this way, reduces the risks from country-specific economic downturns and diversifies the growth of the company.

Through the normalisation of relations with Israel and the restoration of ties with Qatar, real

estate investments are supported; hence, the company can take advantage of this untapped market (S&P Global, 2021).

Low Mortgage Interest Rates

In 2021, the real estate market is a soft market, so residents are encouraged to buy properties instead of renting them by offering low mortgage interest rates in order to combat the aftermath of the COVID-19 pandemic (S&P Global, 2021).

Threats

Volatility of the Real Estate Market

As the author mentioned several times in this paper, the real estate industry is cyclical. Thus, it is highly sensitive to economic fluctuations, so when the economy experiences a downturn or a contraction, the company is heavily impacted negatively because it also a luxury product as well. In general, real estate market is volatile. However, UAE, the country in which DAMAC Properties mainly operates, is more volatile compared to other developed countries. During the analysed period, it’s volatility can be proven as revenues of the companies dropped due to geopolitical crisis of oil market prices falling in the Middle East. Likewise, aside from the stabilisation of the industry, the company has now to worry about the impact of the coronavirus pandemic (Bloomberg, 2021).

High Vacancy Rate

Due to the COVID-19 pandemic, there is a high availability of housing in the UAE because of low occupancy rate, as expatriates leave the country due to loss of jobs leading to oversupply of properties. Hence, the renting and buying prices of properties decline, so now buyers can buy properties even below its replacement costs (S&P Global, 2021).

2.3 Recommendations

Based on the financial analysis conducted in this bachelor’s thesis, there are several financial strategies which can be proposed to DAMAC Properties in order to combat the factors which affects its financial health harmfully. These recommendations tackle areas which are challenging for the company which can support it to improve and optimise its financial situation.

Firstly, the company should improve its cash flow management by preserving its cash flow. In the horizontal analysis of cash flow statements illustrated in table 7, the company’s net cash flows was in a decreasing trend. Furthermore, although net cash flows express positive values, the net increase of cash flows during the analysed period can be seen constantly presenting negative values starting from 2016 with -1 409 118 000 AED to 2019 with -1 411 582 000 AED. This indicates that this has been a long-running issue that needs to be addressed because obviously it endangers the company to run out of cash, especially with the occurrence of the COVID-19 pandemic so the company needs to manage its cash flow wisely. In order to

conserve the company’s cash flow, negotiating with suppliers to come to an agreement for a longer credit terms can be considered by the company.

Secondly, the company should optimise the costs it incurs. In the vertical analysis of income statements illustrated in table 10, the percentage of the company’s cost of sales over revenue was increasing despite the fact that the revenue was decreasing; hence, closing the gap between the two, during the period. Therefore, the company should scrutinise the components of its cost of sales and try to minimise the unnecessary costs incurred in order to optimise it. This could be done by doing a budgetary control regularly. Additionally, as mentioned earlier, the company hires external contractors for the designs and constructions of its projects. As it still has several properties under development, the company may consider creating its own construction team which may help cut costs. However, before doing so, the company should first weigh down which would cost them less.

Thirdly, the company should put its assets to use efficiently. In the activity ratios displayed in table 13, both ratios show a downtrend in the analysed period. Although the company had its total asset turnover slightly higher than its peer companies by 0.03, its receivables turnover shows a -1.12-difference compared to them in 2019. Nevertheless, the company should try to improve both ratios. A possible way to achieve this is by increasing sales either by giving out discounts, incentivising for early payment or initiating promotional campaigns.

Lastly, the company should improve its risk management. From the bankruptcy prediction models used in the performed financial analysis, the Kralicek Quick Test illustrated in table 20 infers that the company is just exposed on an average level of insolvency risk. At the same time, the Altman Z-Score also suggests that the company is in the grey zone. Although these are not terrible results, both models exhibited rising trend of exposure to risk of insolvency.

Henceforth, the company should be proactive in stopping this trend and prevent insolvency.

For instance, the Kralicek Quick Test identified X3 and X4 as the highest possible areas in which the company may be exposed to risks, so the company should attempt to mitigate these risks. Nonetheless, drawing up a contingency plan must be in order.

These are just some of the feasible ways DAMAC Properties can do for the betterment of its financial position based on the conducted financial analysis. In spite of that, there are still some areas of the business which can lead the company to improve its financial situation.

Conclusion

For more than 18 years, DAMAC Properties has been leading and shaping the Middle East's luxury real estate industry. Residents from all over the world, namely the UAE, Lebanon, Saudi Arabia, Jordan, Qatar, United Kingdom, Maldives and Canada, has been provided with properties of the finest quality granting them to experience the pinnacle of stylish and luxury living (DAMAC Properties, n.d.).

This bachelor's thesis seeks to investigate and assess DAMAC Properties Dubai Co PJSC's financial position using financial analysis over a five-year period from 2015 to 2019.

Appropriately, these findings were used to develop feasible strategies for improving and optimising the company's financial situation. The structure of this bachelor's thesis is divided into two sections. The first section provides theoretical and methodological background, with an emphasis on understanding the concept of financial analysis. The second section is the results and discussion, which focuses on the actual calculation of financial indicators based on the structure.

During the analysed period, the real estate market in the UAE was in the middle of stabilisation.

In 2015, there was a geopolitical crisis felt by the whole Middle East as oil prices dropped which has led to an economic downturn. Afterwards, in 2016 to 2019, it was the beginning of stabilisation of the real estate market as it began to feature a soft market due to changes in consumers’ preferences by favouring ready properties over off-plan properties and due to oversupply.

DAMAC Properties financial position can be concluded as sufficiently enough to survive. Its overall results indicate that the company must develop several aspects of its financial management which are mostly related to its operating activities. Firstly, the results of its financial ratios in terms of liquidity, activity, profitability and valuation suggest the need for improvement. Furthermore, the bankruptcy prediction models utilised reveals that the company is in an ambiguous position, as both models reckon that the company is doing average or in the grey zone. Moreover, the study infers that the volatile nature of the real estate market requires constant and utmost attention from the company. Especially now, with the occurrence of the COVID-19 global pandemic that has led several nations to suffer from economic downturns.

Unfortunately, this is not covered in the analysed period as the company has not yet published its annual report for the year 2020.

Having said that, it is safe to assume that the real estate industry has taken a hard hit from the COVID-19 pandemic. Primarily, this is because of the unavoidable imbalance between the supply and demand, leading to the oversupply of properties due to expatriates losing their jobs;

therefore, having no reason to stay in the UAE (Saba & Barrington, 2021). Also, it is important to note that expatriates make up over 80% of the country’s population (Edarabia, 2018). As a result of this imbalance, property sales may be slower and rental prices may drop even further (Saba & Barrington, 2021). These are some of the most probable and already existing impacts of the global pandemic which the industry may have a difficult time in recovering from.

This study stresses the importance of conducting a financial analysis. For someone who does not how to analyse financial statements, the numbers presented may fool them into thinking that the company is financial healthy. But with financial analysis, this false sense of security can be instantly eliminated, as it provides insights in several aspects of the business by identifying trends and benchmarking financial ratios against the company’s peer companies.

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