Are dark clouds gathering for the perfect storm once more in Dubai?

“Tie them up properly like bunny ears, and you won’t trip on them over and over!” You can expect a six-year-old to listen to his dad and proceed to carefully tie his shoelaces into a double knot. It’s just good sense, and he’s a good boy who can see how much trouble these loose shoelaces can be when left unchecked.


Apparently, this basic expectation is too much to ask of the glamourous city of Dubai.

Over the past seven years, the Dubai property market has been slowly but surely clawing its way back to health from the nasty crash of 2008. Signs have been good year after year. Prices steadily rising, bank lending to real estate sector projects becoming more liberal, and the construction sector has been booming again.

House prices last year soared 27.7%, and the Dubai Land Department is happily attributing it to a strong economy. That sounds reassuring, right?

Well, not really…

In fact, it is an all-too familiar deja vu of a perfect storm that may very well lead Dubai yet again to a burst bubble promptly followed by abandoned projects, an exodus of debtors and cries of help for neighbouring Abu Dhabi to step in and shore up their over-extended finances.

Half empty or half full?

Actual demand of live-in owners and tenants in the emirate is far below the growing supply of units, and things are only getting worse as an overenthusiastic construction industry churns out more and more units. Prices are going higher and that is making the Land Department happy, singing praises of the growing economy. But the number of transactions is actually down by almost 25%.

“The gap between what the seller is asking for a property and what the buyer is willing to pay is huge at the moment,” says Parvees Gafur, Propsquare Real Estate’s chief executive.

Office vacancy rates have reached a staggering 45% last year, almost half. Meanwhile, Ahmed Bin Sulayem, the head of a government-owned business zone, still thinks there is room to build the world’s tallest office tower yet.

Most transactions on property are again occurring on off-plan units of unfinished projects.

A Dubai banker, requesting anonymity has told Reuters that many banks are offering 100% financing deals to real estate developers – he states plainly that this is not sustainable.

Even the Central Bank came out last June with a highly unusual warning that the real estate market is overheating. The move is considered so rare because authorities in UAE never discuss negative economic risks in public.

The Dubai government says that they are taking measures to control flipping and speculative trading of property units, yet their most impressive action was to increase the property deal fees from 2% to 4%. Comparing that to Singapore’s 30% imposed fees on quick property resale, one can quickly see how minor these measures are.

Meanwhile, USD50 billion worth of real estate projects have been announced over the past 18 months, and construction loans have soared by over 40% to match them.

There were some arguments that matters aren’t that bad since Dubai property prices are still significantly lower than Hong Kong and Singapore (around USD650 per sq ft in Dubai as against USD2,000 in Singapore). The comparison however does not hold water for long considering the fundamental difference in the nature of their property supply – Singapore is a city-state island that is fully developed and has run out of space, with its CBD vacancy rates stable at 6.1%. Dubai, on the other hand has massive unobstructed flat desert plains to develop and has unsustainably high vacancy rates that exceed 40%.

The Arab Spring conflicts may have brought an inflow of foreign investment and buyers. There are many people who have fled their countries and have come to Dubai in search of a safer home or a place to put their money. A lot of deals have been carried out in cash and have therefore bypassed all bank mortgage limits. This only encouraged further speculation as for most of those people, property trading and investment was the easiest thing to get into. Seventy per cent of the latest property transactions have been carried out by non-local Arabs using cash.

Mirage of a bubble?

IMF has been calling outright for stronger anti-bubble measures, citing both Hong Kong and Singapore as examples to follow. Yet such warnings against unsustainable excess and aggressive, unregulated real estate markets are going unheeded; statements from the authorities seem to be focused yet again on breaking records and the ruler’s vision.

So it comes down to learning lessons, and the case right now seems to be that Dubai officials have not learnt theirs.

Whether or not a bubble is forming, the indications are clear that a continuing rising property market in Dubai is economically unfeasible.

samhelmySam Helmy is a serial entrepreneur, property investment expert and speaker in Dubai, London and Kuala Lumpur. He has been developing and sharing successful real estate investment concepts and strategies for over a decade.


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