Supreme financial committee to tackle Dubai realty crash

Posted on 20 November 2008 with no comments from readers

When Dubai’s biggest mortgage lender Amlak Finance announced yesterday that it had suspended all new home loans, it is time to acknowledge what is quite obvious to any observer: the Dubai property boom has crashed. There are no sales, except at very distressed prices, and new project launches have flopped completely this autumn.

Eight weeks ago Dubai created a supreme financial committee to make recommendations on Dubai’s sovereign debt and the debts of state-controlled companies. The committee includes Amlak chairman and director general of the Dubai Department of Finance, Nasser Al-Shaikh, Emaar boss Mohamed Alabbar, UAE cabinet minister Mohammed Al Gergawi, Dubai Islamic Bank chairman Mohammed Al Shaibani and Borse Dubai chairman Essa Kazim.

Nakheel

It is perhaps strange not to see Dubai’s biggest state property developer Nakheel represented on this committee. Some might argue that Nakheel’s portfolio is the one most obviously in need of trimming back in the light of the challenging global business environment, and it almost certainly carries the biggest state debts.

Mr. Al Shaikh has told local media that the committee will not be looking after the private sector, and will be giving its recommendations directly to the Ruler of Dubai and UAE prime minister Sheikh Mohammed bin Rashid Al Maktoum. He said property projects that are under construction or announced would go ahead as planned but that Dubai may face some postponements in real estate projects.

The next 18 months are going to be difficult for Dubai but Mr. Al Shaikh subscribes to the view that Dubai can be last into the global real estate crisis and one of the first out. The outlook for oil prices, with a $4 trillion is bailouts and stimulus packages now announced, is bright and could quickly fuel up the UAE economy for a recovery.

Shake-out

However, a proper shake-out of weaker property development companies, and a rationalization of the state sector will be good for the long-term health of the Dubai economy which has been overheating with too many projects going ahead at the same time leading to pressure on construction material prices and traffic congestion, and threatening over-supply.

There is also a powerful triumvirate committee at the UAE federal level also examining how the country should reorientate its spending in response to the global financial crisis.

The task for the Dubai and UAE authorities is to quickly agree on a revised business plan and to implement it while other countries around the world dither and debate. Usually when a booming market is taken for reassessment it becomes very obvious which are the weaker and less economic projects, and which should be safeguarded as long-term winners.

Strong survive

An economy makes progress by letting the strong survive and the weak fail. Interestingly this is exactly the reverse policy to what is being pursued in many developing countries. Supporting weaker banks just makes it harder for the stronger ones to make profits. Bailing out economic basket-cases like US auto giants saves jobs today but costs them in the long run.

Let us hope Dubai and the UAE can grasp the nettle and sort out the good from the bad. It will not be an easy task, the losers are not going to be happy people. But you do not create a strong economy by supporting losers. You need to focus the available resources into the most economically productive areas of the economy and put the rest on hold for better times.

I think Dubai and the UAE will get that right by reassessing the value of projects to the long-term future prosperity of the emirates, and the sooner it is done the quicker the recovery will be.
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