UAE realty prices threatened by high construction activity

Stepping off a plane in Dubai you can be forgiven for noticing that the cranes have stopped swinging over many constructions sites. But equally you could also remark on the still very high level of construction activity in the city, and if you go to Abu Dhabi you would not think there had been a credit crunch.

Figures released by Proleads noted that out of 1,328 UAE projects that it tracks 704 valued at $398 billion are ’still being executed’ although 328 of these worth $243 billion are ‘on hold’ and 52 ‘taken off the books’. That leaves 324 active construction sites worth around $150 billion.

This is a huge slowdown from the boom of last year. But it still represents a considerable amount of construction activity. Not all projects by any means have been cancelled or suspended due to the ’sudden stop’ that hit the UAE economy last autumn with the global credit crisis.

Money still flowing

It is clear that for certain projects there is still money available. The larger partly state owned developers in Dubai and Abu Dhabi are still well funded with credit lines available as necessary. It is generally the smaller contractors with a few smaller projects who have suffered most. Nakheel is the exception to that general rule.

Developers found that last autumn off-plan sales dried up overnight, and simultaneously the global credit crunch cut off bank facilities for many of them. Contractors soon realized that they would not be paid any more and walked off sites.

This is clearly bad news for investors in these projects, although the more recent launches were protected in Dubai by escrow accounts. And a myriad of legal actions are now chasing that money. How much will be returned remains to be seen.

Larger developers are consolidating their off-plan buyers into projects that are either completed or near to completion. There are some grumbles about not getting what they subscribed to but most buyers are very relieved to be getting something after a tense waiting period.

For the moment the stress among developers with money available is finishing off projects. That does lead to another upcoming issue, namely a large supply of new property about to hit the UAE market in a global and local recession with the net population actually falling.

Prices to fall again

Swiss bank UBS forecasts an additional 33 per cent decline in Dubai property prices within a few months after the already 50 per cent decline from peak levels last year, mainly due to the upcoming oversupply of real estate in the emirate. It is hard to put a precise figure on the volume of completions and the time scale but around 30,000 units are expected to be delivered in Dubai by the end of 2010.

Even in a healthy market this would require very high growth levels to take up the space. But with Standard Chartered Bank predicting a mild recession of minus 0.5 per cent for 2009 in the UAE and a small recovery next year this is just not going to happen.

Thus the high level of construction activity in the UAE is both a blessing and a curse for the local economy. Upcoming supply is going to hit real estate prices again.