Dubai and Dublin share a common debt problem in real estate

Dubai and Dublin are many thousands of miles apart on different continents but the property crashes that have afflicted both cities have left a similar legacy in terms of debt mountains and a question mark remains over how this issue will be resolved.

Since peaking out in 2007 Dublin real estate has lost 40-50 per cent of its value, and many once wealthy developers are now left with huge debts to the banks and negative equity positions. The central bank is trying to organize property debt into one ‘bad’ bank to try to cleanse the system but as times improve banks or the ‘bad’ bank will increasingly call in these loans.

Property crash legacy

This is the second leg in the downturn that follows a property collapse, and inevitably it makes the subsequent recovery slower and more painful for some developers than would otherwise be the case.

Dubai has also seen a similar fall in property values over an even shorter period since last September, and it is only now that dazed market participants are coming to terms with what has happened. There is some hope that a post Ramadan upturn in local investment may ease the market, already looking a little brighter after the oil price recovery.

But the legacy of debt that hangs over Dubai from the property boom of the 2000s is not unlike Ireland which now has the highest debt burden of any European nation. Admittedly the Dubai real estate debt is not mainly mortgages on individual properties, it is mainly owed by developers and most of those are state owned or state controlled.

But then again that means Dubai has an upcoming supply of almost completed property that will leverage against price recovery. Ireland is more a question of price adjustment after a long period of low mortgage rates. Part or nearly completed developments are seen in Dublin but not nearly so evident as in Dubai.

Mature versus emerging markets

That is the difference between a mature market sent sky high by low-cost money, and an emerging market under easy money conditions with no constraint on development activity. And it is much easier to rebalance supply and demand without the excess supply to the extent now seen in Dubai.

That said it may be easier for the Dubai Government to refinance than Dublin developers who face bankruptcy if they can not re-engineer their loans. Its cash flow is good and the backing of the Abu Dhabi Government is enormously helpful.

But what both Dublin and Dubai would really benefit from is an upturn in the global economy, something to revive the fortunes of the multinationals that have made these cities rich in recent years and will likely do so again in the near future.