“We will likely see a lot of market activity across real estate names in both Abu Dhabi and Dubai and this news will help the stocks in the short term,” said Sebastien Henin, who helps oversee $100 million at The National Investor in Abu Dhabi. “We should expect more mergers as the companies lead the way.”

The two builders, part of Abu Dhabi’s drive to remake itself into a tourism and business hub, set up a team to study a possible merger with the “blessing” of the emirate’s government, which owns stakes in both, according to a joint statement yesterday. The team will present a plan in the next three months.

Aldar and Sorouh shares have rallied this year after oil- rich Abu Dhabi said it plans to resume stalled projects including branches of the Louvre and Guggenheim museums. The ADX Real Estate Index (ADRE) has surged 39 percent in 2012 after a 54 percent slump last year. Property prices in the emirate dropped by half since the market’s peak in 2008 as the global credit crisis forced banks to curb lending and speculators fled.

“The consolidation is something positive for the market in all sectors, not just real estate, but also financial,” said Yazan Abdeen, who helps oversee about $250 million as a fund manager at ING Investment Management in Dubai. “This is part of a confession the market is going through in realizing the real quality of the assets.”

Construction Drive

Aldar and Sorouh are leading a construction drive in the U.A.E. capital, sparked by government projects and investment. Sorouh has been building thousands of homes, offices and retail spaces around canals and parks on Abu Dhabi’s Reem and Lulu islands. Aldar, also building thousands of homes and offices in Abu Dhabi, received 36 billion dirhams ($9.8 billion) in government support last year and sold assets including a Ferrari theme park to the state. The government also said it would retire debt related to infrastructure on Yas Island.

The U.A.E. property market is still fragile after residential real-estate prices in Dubai slumped more than 60 percent from a mid-2008 peak. Rents in Abu Dhabi will drop further in 2012 as property supply outstrips demand, according to real-estate consultant CB Richard Ellis Group Inc. Developer Nakheel PJSC escaped default with the help of an $8.6 billion bailout from the Dubai government.

No ‘Game Changer’

“This is not a game changer for the real estate sector, as it remains depressed,” said The National Investor’s Henin.

Tamweel PJSC (TAMWEEL) and Islamic lender Amlak PJSC (AMLAK) provided almost 90 percent of all mortgages in the U.A.E. before the market slumped starting in 2009. Tamweel resumed lending for the first time since October 2008 after Dubai Islamic Bank PJSC (DIB) raised its stake to 58 percent in September 2010 to help support the mortgage market. Emirates NBD PJSC, the U.A.E.’s biggest lender by assets, last year took over unprofitable Dubai Bank PJSC, which was rescued by Dubai’s government in May after loan losses increased.

The merger talks are “a strong move to consolidate on the extra capacity that both companies have, so that should be good news,” said Mostafa El-Maghraby, an analyst at Kuwait-based Global Investment House. “A lot is still not clear, so it is difficult to say if this will be good for shareholders.”

Aldar shares surged 8 percent to 1.22 dirhams yesterday, bringing its gain for the year to 33 percent. The stock tumbled 60 percent in 2011. Sorouh (SOROUH) also rose 8 percent to 1.22 dirhams yesterday. It has risen 44 percent in 2012 after losing 48 percent last year. That compares with a 7.7 percent rise in Abu Dhabi’s ADX General Index (ADSMI) so far this year.

Profit Surges

Aldar had assets of 40 billion dirhams at the end of last year and Sorouh had 14 billion dirhams. Aldar reported a full- year profit that beat analyst estimates after a year-earlier loss. Sorouh’s 2011 profit surged to 334.7 million dirhams from 7.44 million dirhams as rental and housing income rose.

Aldar this month had its outlook raised to “positive” from “negative” at Moody’s Investor Service. The company has a market value of 4.98 billion dirhams while Sorouh’s is 3.2 billion dirhams.

“This will make perfect sense,” Haissam Arabi, chief executive officer of Gulfmena Investments, said by phone yesterday. “I don’t see a reason for two mega, master developers with similar business propositions or offerings to remain separate.”

To contact the reporter on this story: Zahra Hankir in Dubai at zhankir@bloomberg.net

http://www.bloomberg.com/news/2012-03-11/aldar-sorouh-merger-talks-may-spark-consolidation-among-u-a-e-companies.html

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