Dubai needs safeguards against property bubble

Dubai’s economic recovery is gaining momentum, riding on the back of a dramatic upturn in the property market.

The real estate sector, which has rebounded from a 50% drop in home sales prices after the 2008 financial crisis, has seen average residential rentals grow by over 30% over the past 12 months, consultancy CBRE said last week. And bellwether Emaar Properties, the emirate’s largest developer and builder of the Burj Khalifa, has posted a 10% growth in second-quarter net profit. The buoyancy is reflected in a booming stock market, which has gained 37% in the first half, making it one of the best-performing exchanges in the world.

In the last few months, state-linked Dubai companies (GREs) have announced a slew of mega projects. Last month, Emaar said it would form a venture with Dubai Holding to build Dubai Creek Harbour, a 6.5mn sq m district including business, shopping, sporting and entertainment facilities. Emaar separately formed a venture with Meraas Holding to build a residential and commercial area near the city’s downtown area. The Meydan Group and the Sobha Group have announced plans to develop a leisure, retail and residential complex.

Among the ambitious plans is Mohamed Bin Rashid City (MBR City), a multibillion dollar, decade-long development with exclusive features including the world’s biggest mall, a Universal Studios theme park and a park larger than London’s 350-acre Hyde.

Signs of a resounding turnaround? Wait a minute. Dubai’s property sector may be too hot, the International Monetary Fund warned last week. “It is too early to speak of a bubble, but should price increases continue to take place at this pace, action will need to be taken to prevent a bubble,” IMF mission chief to the UAE said last week.

A big question mark over these grandiose plans has been their financing and demand. A local publication has estimated that the projects would require a total financing of over Dh666bn ($180bn). Compare that with Dubai’s debt standing. Total debt remains substantial at $142bn, or around 102% of its GDP, and $35bn of that amount is in government and government-guaranteed debt. The GREs have increased their debt to an estimated $93bn from $84bn in March 2012. The IMF estimates that about $64bn of debt will come due between 2014 and 2016.

Dubai is also witnessing a sector-wise demand mismatch. An oversupply of office space is causing occupancy levels to fall below 50% in some locations, CBRE said in April. The situation could get worse with numerous new office blocks expected to be ready in the next few years.

Over-inflated Dubai property prices crashed by more than 50% in 2009 and 2010, triggering a corporate debt crisis which unsettled financial markets across the world. The emirate, for sure, cannot afford another boom-bust cycle, which can derail a broad-based recovery gained through painstaking restructuring and asset sales. The tremors of crippling property collapse will be felt not just in the region, but in the global markets.