Is gloomy Nomura right about Dubai property?

Posted on 22 February 2009 with no comments from readers

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Japanese investment bank Nomura once caught the headlines with its early prediction of the 2006 Dubai sock market crash. Now Nomura appears to be offering a similarly gloomy prognosis for the real estate sector outlook.

It is not the 15 per cent or so additional fall in real estate values that the bank forecasts that troubles observers: a 25 per cent plus crash in market prices since last September is generally acknowledged. It is the Nomura scenario which has excess supply weighing on the market recovery that is controversial.

Off-plan fall-out

In a nutshell Nomura argues that the off-plan sales model – that first netted developers rapid new orders and buyers quick profits – has turned toxic.

It says off-plan buyers will now fail to complete their purchases – partly because final selling prices have fallen, but more significantly because they do not have the cash or home finance available any longer, or were always intending to sell their unit on before final delivery.

That will leave developers with a lot of unsold apartments and a few villas. Nomura sees the solution for developers as being to off-load these units into the rental market. But this solution will be hampered by lower rents, lower occupancy levels and higher finance costs as the UAE economy weakens.

Not every development company will be in a financially solid enough condition to move from build-for-sale to build-to-rent, and therefore a shake-out of the weaker firms would seem inevitable.

Contractors stop work

Nomura also highlights another problem with the practice of using off-plan properties to finance construction. That is the payment of contractors in stage payments, so that if the flow of new sales runs out the construction project stops half-built due to a shortage of money.

This might explain why the cranes are no longer swinging over many Dubai construction sites, with anecdotal evidence about ready mix concrete sales suggesting that construction activity has halved. Certainly the absence of construction traffic on the roads and workers on site is clear enough.

However, the recent Nomura report alludes to an estimated supply of 30,000 units in both 2009 and 2010. Now while work has not stopped on every construction site, there must be considerable room to question whether this number of units will now actually be delivered.

Oversupply reduced

It seems that developers, and contractors, are in trouble long before project handover, and therefore the coming oversupply of real estate that underpins Nomura’s gloomy outlook for property prices will not exist.

The quicker the flow of new real estate stops then the faster supply and demand can return to a balance, and price falls stop. However, it is quite obvious from Nomura’s study that there is going to be more pain before the market recovers, most likely on the back of higher oil prices.