Dubai set to cancel a lot of projects in 2011

Posted on 08 December 2010 with 1 comment from readers

Dubai is set to cancel a lot of projects in 2011, allowing investors to get their money back, or what is left of it in escrow accounts, according to an exclusive interview with RERA chief Marwan bin Ghalaita carried by ArabianBusiness today.

He said: ‘You will see a lot of cancellations [in 2011] for projects that have no benefit for Dubai or for the investor…. If a project is not feasible for Dubai’s economy, it will be cancelled. And owners will have the right to know it… Yes, there will be cancellations… If a project does not add to Dubai’s economy, it will be cancelled.’

To date ‘less than ten’ projects that had started construction have been cancelled in Dubai, he revealed, although 115 on the drawing board have been axed. Official cancellation is a vital step as without this off-plan investors cannot get access to their money which is held in escrow accounts for the construction process, whether or not it is going ahead.

Day of Reckoning

The RERA watchdog CEO explained: ‘Now, the end of 2010, I have clear picture of all of the projects here in Dubai…. Now it is clear on my dashboard, to see what project will go ahead, which project is in ICU, which project is in the emergency room, which project is fine. And this is the way we will classify projects here in Dubai. Green, emergency, ICU, dead. This is the way we have worked for the whole of 2010.’

What does this mean for the Dubai real estate market in 2011? In theory this should lead to a reevaluation of future real estate supply, already looking far lower than some estimates that simply totted up the projects launched on paper.

In the same ArabianBusiness interview Marwan bin Ghalaita also said that the amount held in escrow accounts is presently AED5 billion, down from AED7 billion at the height of the boom. The AED2 billion is what has been spent on construction since then, and not all projects have stalled completely by any means.

The return of a portion of these funds in 2011 will be good for the local economy both in terms of a direct capital injection but even more so in the removal of a source of financial worry for many individual investors. They will know better where they stand financially, and Dubai real estate will understand its supply position better.

Many more bankruptcies

Whether this is enough to put a bottom under, or even reverse the Dubai real estate slump is unlikely, but it is certainly a major step in the right direction. There is of course a downside.

The developers who have their projects cancelled will most likely owe money to the banks, and these bad debts may not have been fully written down by the banking sector when they are called in and the developers declared bankrupt.

A spate of real estate bankruptcies will inevitably follow and in the process repossessed property will likely be dumped on the market, lowering Dubai property prices further. Only then will the market finally hit bottom.

Investment opportunities are always best at the bottom of the cycle as the ArabianMoney newsletter will consider in the January edition looking at 2011 (click here to sign-up).