Will a stronger oil price save Dubai real estate?
Posted on 21 May 2009 with no comments from readers
With oil prices touching $62 yesterday there is some reason to think that the Gulf States could have an early exit from recession. Higher oil prices would provide the cash flow to pull the region back into the black.
But can oil price optimism extend to a scenario for a recovery in Dubai real estate given the scale and the extent of the downturn of the past six months, and the huge amount of over-building that is self-evident to any visitor to the city?
If the city were starting from the point of a relatively fixed supply of property then to expect a rapid rebound in house prices would be eminently possible in an oil price recovery. But this simply is not the case.
Over-supply
How many years’ supply of apartments is now coming on to the market? How far ahead are the shopping malls against realistic population growth forecasts? Is the doubling or trebling of the Dubai office supply at this time going to help a real estate market recovery?
The real optimists counter this argument with a string of totals from largely state-run organizations and their staffing requirements over the next few years.
It is true that the new Dubai Mall may well have created 10,000 jobs. But there is downsizing going ahead in almost every company in the city, while many of the ambitious expansion plans at the state entities are being scaled back, with job losses.
Dubai is being forced to reinvent itself as a leaner, more efficient, economic machine, and cast off any project or person who is not likely to make an immediate contribution. It is a Darwinian process of the survival-of-the-fittest, and is essential to preserving and growing the long-term competitive advantage of the city.
Staff cuts
Not to do it would be madness. But in an expatriate city, and around 95 per cent of residents are not local citizens, then downsizing also means that people are sent home, and no longer require accommodation for living or working.
These people or their replacements will of course come back for another oil boom, and need places to live and work again. And that is where the eventual recovery in the Dubai housing market will come from in the future.
However, until we get to the equilibrium point in the real estate market – with the demand for property actually running ahead of available supply – then it is very hard to see an end to declining prices and rental income. This is the most basic of economic supply and demand predictions and losing sight of it is the biggest error any realtor can make.
