UAE last in, and first out of real estate recession?

Posted on 03 December 2008 with no comments from readers

If the UAE is the last real estate market in the world to enter a correction then is it too optimistic to hope that it might be the first to come out of a downturn? My argument is that the inflationary effects of the multi-trillion dollar bank bailouts are not to be underestimated, and a rapid return to higher oil prices would likely put the local property boom back on track.

All the same it is quite obvious to any observer of the UAE property scene that this autumn has seen a boom turn to bust. In September Dubai villas and apartments were still selling for record prices, by October the market fell sharply, according to figures from HSBC. Dubai villa prices were down 19 per cent month-on-month, and apartments in the Dubai International Financial Centre dropped by up to 30 per cent.

The month of October began badly with the Cityscape Dubai 2008 exhibition that saw an almost complete failure of off-plan sales. Even in Abu Dhabi the off-plan buyers have been very thin on the ground this season, just six months earlier at the Cityscape Abu Dhabi people were queuing down the road to buy.

Crash analysis

Looking at the immediate reasons for the crash the finger can be pointed at global and local factors. From a local perspective the boom became oversold with prices spiking to levels that were unaffordable, and then local banks became embroiled in the credit crunch and tightened up mortgage lending criteria. At the same time, global stock markets crashed in October and international credit markets froze, compounding the local downturn.

It is presently very tough to sell any off-plan or secondary property in the UAE, and the deal flow has slowed to a trickle. Dubai Land Department figures still look fine but the deals being registered today were concluded long ago.

Real estate developers have fired sales staff. They have been leaving anyway because commissions have dried up. Estate agents who were busy over the summer are now very quiet indeed. The shift from feast to famine for the sector has been frighteningly fast, and the endless double-page spreads of real estate advertising in local newspapers have gone.

However, the supply and demand fundamentals have not changed much in Dubai. Indeed, the rental market is tighter than ever because people are not buying and renting instead. It remains to be seen how long rents can continue rising if local firms begin to cut back staff and send them home in an economic slowdown. But such is the backlog of demand for housing that this could take some considerable time to become evident in the market place.

Demand factors

One study of local housing demand published over the summer showed that upcoming supply barely met the forthcoming demand from the Dubai state and state-controlled companies, let alone the private sector. Groups like Emirates Airline have massive staff accommodation requirements, and for each new A380 super jumbo that lands in Dubai dozens of apartments will be needed for the flight crews.

It would take a really big slowdown in growth from such companies to put a serious dent in demand for housing. And this study did not even start to assess demand patterns from the private sector in Dubai, with many major financial institutions planning to move large numbers of staff into the city, or the impact of Abu Dhabi’s expansion where there is so far no new accommodation available at all.

In economic jargon this is called momentum. An economic boom of the type seen in the UAE since 2002 does not come to an end quickly, even if real estate sales grind to a halt. There is huge work-in-progress, and a massive amount of money committed, a great deal of it equity and not debt.

Besides debt must be kept in proportion to GDP. The UAE has debt equivalent to around 50 per cent of GDP compared with more than six times GDP in the UK and 3.5 times in the USA. And the UAE’s debt turns to a net surplus when its sovereign wealth funds are taken into account.

1999 precedent

Long-time UAE watchers compare the panic of October 2008 to the UAE stock market crash of 1999. Then as now Emaar Properties stock took a hammering. Investors thought the end of the world was coming, and sadly a few committed suicide. In 1999 some bankers left the emirates convinced that the real estate market was going into a meltdown. But the UAE recovered from the aftershocks of the Asian Financial Crisis very quickly, and the oil price bounced back from under $10.

This correspondent lived through that period and experienced just how quickly the UAE economy can recover from what looked like a very serious position. Is it so different today? Admittedly the scale of the projects and the amount of over-building is more dramatic than in 1999 but then the UAE economy is that much stronger too after seven years of booming oil prices.

Help is also at hand from oil consumer nations whose response to the financial crisis this autumn has been a quite unprecedented series of bailout packages now totaling more than $4 trillion. The US money supply has more than doubled in two months. Even in the Great Depression of the 1930s money supply increases never went above 15 per cent. It just has to be hugely inflationary, and the time lag between stimulus and inflation is nine months to a year.

That will mean high oil prices will be back within a year, and the revenues that drove the UAE real estate ever upwards will return much more quickly than any body anticipates this gloomy autumn. Anybody dumping property now could live to regret it, as higher general inflation will carry rents and capital values higher at least in nominal if not real terms, as salaries will also have to rise sharply.

It is all too easy to move from being wildly over-optimistic about UAE property to being irrationally depressed, and to forget that we live in a world of rapidly changing economic circumstances. For UAE property the correction could be short and the upturn strong as it was in 1999. Economic fundamentals are all that count in the end.
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