How will another global financial crisis impact Dubai property?

Posted on 27 August 2009 with no comments from readers

Perhaps the global financial crisis will prove a blessing in disguise for Dubai. Greater global regulation and higher taxes could lead to an exodus of the financial industry to offshore locations. The Dubai International Financial Centre is uniquely well qualified to fill this role.

Indeed, nothing would fill up the offices, apartments and villas faster than an influx of refugees from the global financial crisis.

Of course, the falling office and housing rents of recent months will also boost the appeal of Dubai to the banks and financial institutions. Housing remains the biggest single cost item for employees and has become prohibitively expensive, although financial service companies do normally operate in high cost locations.

Infrastructure improvements

Probably more important to financial concerns is the quality of the infrastructure available in a city. When Dubai was choking with traffic and construction activity, several major banks shelved plans to move more staff to Dubai. Maybe now with the metro about to open as well as a locally printed Financial Times they will feel more at home, and the congestion has gone.

However, this is most likely all a little premature. The global financial crisis may not have yet fully run its course. And even if this ultimately benefits Dubai these institutions are just not going to minded to move home at this time.

This could leave Dubai property in an awkward state of limbo for sometime to come, and the weight of new accommodation coming onto the market suggests that the downtrend in prices will resume rather than a recovery emerge earlier than most market participants think possible at the moment.

Indeed, there is also a postscript about the immediate outlook for the global economy. Stock markets have risen perhaps too far and too fast around the world. There is a sense of déjà vu in that this looks like a repeat of last September, only it is worse.

We know that Chinese exports have slumped by a quarter this year, that Japanese exports to the US are down 38 per cent, and that the key Baltic Shipping Index has slumped over the past 11 weeks, suggesting global trade is still contracting sharply. The stock market recovery looks a mirage of over optimism, all set for a reversal, just like in last September.

If this assessment proves correct then oil prices should take a tumble again like last autumn, and may retest the low of $33 a barrel. Dubai property would not enjoy a good autumn in such a bearish economic phase.

Crisis impact

Buying real estate is a major commitment that people will be reluctant to undertake at a time of global financial turmoil and the absence of buyers would have an inevitable impact on prices. Credit also tends to tighten under such circumstances, although it could be that the UAE Central Bank decides this is the point at which lower interest rates become essential for economic well being.

In that case you could plausibly suggest that another global financial crisis might represent the bottoming out of Dubai real estate. For usually the peaking out of interest rates marks the bottom of a down cycle in property.

Then you would be looking for recovery drivers for Dubai property, and that must surely come in higher oil prices. But then again we are going to be at the mercy of the global economy until Peak Oil Theory kicks in and a declining supply of oil works magic on prices. If only Dubai real estate was not in the reverse position with rising supply against declining demand.