Can Sheikh Maktoum be right about another Dubai boom in two years?

Al Fajer Properties CEO Sheikh Maktoum Hasher Al Maktoum certainly caught the headlines this week with a prediction that Dubai will boom again within the next two years. Is this vision a little premature and wishful thinking, or does it stand up to hard economic analysis?

For the record Sheikh Maktoum said: ‘My prediction is that in the next 24 months there is a boom coming that will take everyone by surprise… We’ve had our hiccups, but what I see is that transparency has improved, we don’t have any more black boxes and the fundamentals of investment have come back, even though bankers are more conservative at the moment.’

While clearly a member of the ruling family with a big vested interest in Dubai, Sheikh Maktoum does have additional credibility in that he spotted the real estate bubble and held back from investing until it popped, allowing him to buy at a 50 per cent discount to peak prices.

Quick recovery?

Naturally having placed his stake on the future, he would now like a quick return. Will he get it? It is impossible to say. Certainly a poll in The National newspaper yesterday showed that 95 per cent of readers thought the recession was far from over in the UAE.

But then that might be the point of maximum pessimism, indicating the best time to buy assets. The worst time was, of course, when such opinion polls showed that everybody thought property a good buy.

Sheikh Maktoum saw Dubai as ‘a small cup’ which could be ‘easily emptied, but also easily refilled’. This is a version of the hot money-out and hot money-in argument articulated before in these columns (click here). But it is a perfectly valid argument and particularly relevant to a regional business hub.

Where else is there to invest in the Gulf region? Saudi Arabia is hardly accommodating to non-Saudis, and so many countries are fraught with geopolitical risk. Even the prospects of a double dip in the global economy does not necessarily doom Dubai or the UAE.

Higher oil price?

For one thing a double dip would likely bring another spate of loose monetary policy, higher inflation and higher oil prices. For another if stock markets and real estate in the industrialized world offer poor returns then there will be a natural tendency to invest back home. This happened post 9/11 and was greatly to the benefit of Dubai. Foreign investors would also return for the prospect of better returns, and have led the post-Ramadan stock market recovery (not necessarily a good sign).

Sheikh Maktoum also rightly pointed out that Dubai did at least spend its money on infrastructure development in the 2000s rather than the inflation of house prices as in the UK or Ireland. It now has the offices, roads and apartments to accommodate new expatriates looking to escape high taxes and an austerity economy.

But how long will this wheel take to turn? Leading local investment bank Shuaa Capital has just lowered GDP forecast for the Emirates to 1.8 per cent from 2.5 per cent because the recovery has been slower than expected due less public spending and slow credit growth.

Hotels in Dubai reported August occupancy levels of 53 per cent compared with 64 per cent in August a year ago, with revenue per room down 20 per cent. There are now 67,369 hotel rooms in the city, up 16 per cent from 58,188 this time last year.

Oversupply is most evident in office accommodation where one in three units are currently vacant, and this is set to rise to 50 per cent by the end of December. Housing vacancies stood at 25,000 earlier this month but are now on a rising trend. There are two abandoned palm island projects and perhaps 40 stalled office towers in the Business Bay alone.

Debt burden

The government, family businesses and individuals are all hampered by the debts left over from the boom that collapsed two years ago. Nakheel is promising a deal with its banks by the end of the year, and Dubai World says 99 per cent of creditors have agreed to a $23.9 billion debt rescheduling. But the IMF estimate for total government related debts is still almost $110 billion.

It is difficult to know how many individuals working in Dubai are caught up in the off-plan property crash. Sometimes it seems as though the majority has placed a deposit on a scheme that may or may not be built, or is stuck half-way completed. A lot of progress has been made in consolidating projects but there still seems much work to be done.

On the plus side, DIFC chairman Ahmed Al Tayer pointed to a return to double digit growth rates in aviation, tourism, trade and re-exports at a media conference this week in Dubai. But that cash flow is obviously essential to service the debts, and to finish off key infrastructure schemes that stopped suddenly in the crash.

Market bottom?

It all sounds more like bumping along the bottom than a full blown recovery. But you never can tell. It is always darkest before the dawn, and the best investments are made at bargain prices in what seem to be the worst of times.

Dubai will recover. It is only a question of when, not if. Buying cheaply now would surely pay in the future but  whether these are the lowest prices is a very tough call.

The next edition of the ArabianMoney investment newsletter will be out in early October and consider how anybody from the smallest saver to biggest global institution should be preparing to invest in the UAE recovery story (click here to sign up).