Over-supply to hobble Dubai property recovery

Posted on 26 February 2009 with 4 comments from readers

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In 2006 I interviewed the then chairman of HSBC Sir John Bond and asked him how he felt about the Dubai property boom.

‘Don’t you think there is an issue of supply’, said Sir John as we gazed out of the window at a series of high-rise towers under construction along the Sheikh Zayed Road. Well, he might have bought into US banking at precisely the wrong time, but Sir John had a point about Dubai real estate.

Now that the Dubai property bubble has burst, oversupply is clearly a serious issue as far as the future recovery of the market is concerned. Put simply the more quickly an over-supply is eliminated the faster a market can recover.

Supply size

The size of the upcoming supply of property in Dubai is therefore an important factor in the likely speed of the recovery from the market collapse.

The Real Estate Regulatory Authority has now said it estimates that a previous prediction of 31,000 completions in 2009 could come down by 20 per cent due to market conditions, delays and rescheduling. And for 2010 there is likely to be a 40 per cent drop in the forecast of 44,000 completions.

Rera says 25 per cent of projects will not start on time and will be put on hold; 25 per cent are expected to consolidate with other companies; and a final quarter will be rescheduled with the agreement of contractors and developers; the balance will be completed on time in 2009 and 2010.

However, this large amount of property creates what economists call a ‘fat tail’ weighing on the future supply and demand equation for local property.

Global recession

The problem is clearly exacerbated by the outlook for Dubai in view of the global economic recession that is increasingly looking more like a depression, and is certainly going to be a longer and deeper downturn in the global economy than any since the Second World War.

Dubai is a global business, transportation and financial hub city, and cannot escape from this downturn, even if the status of the UAE as one of the richest countries in the world – both in terms of financial reserves per capital and hydrocarbon wealth – will provide contra-cyclical support in the form of higher government spending and the refinancing of local debt.

This will mean a net loss of population over the next couple of years, as companies retrench, fire staff and expatriates return home. Therefore the demand for property will actually be falling at a time when the supply will be rising.

What happens in such circumstances is that rental and selling prices fall, and the population tends to move into the better accommodation and abandon the worst units. There is an upgrading of the average accommodation standard.

Pain before gain

But this is a nightmare for owners and landlords whose property values and rents will enter a steep decline, and indeed this is already what has happened since the real estate market crash began last October.

Dumping more and more supply onto a falling market is only going to make a bad situation worse, and the RERA is right to highlight how supply is now being compressed. But this is not going to be enough to prevent a further downside to Dubai real estate prices as a downward spiral grips the market.

It would be nice to pretend that this is not the reality of the market but only fools stick their heads in the sand.

The positive spin is that Dubai is completing the infrastructure of a 21st century Arabian commercial capital that will eventually form the backbone of its success in the next oil boom, and the sooner that arrives the better for all concerned.