Dubai property recovery vulnerable to credit squeeze
News Article Date: Thursday 22nd of October 2009
DUBAI // The Dubai property market will be under increasing pressure in the year ahead as an estimated 32,000 homes come on to the market but financing for buyers and developers remains scant, leading analysts say.
The revival of the once booming sector, which was battered by price declines of as much as 50 per cent as well as investor defaults and stalled projects since its peak last year, will also depend on the strength of the regional economies.
Issues such as these are bound to be under discussion this week by leaders in the property sector at Cityscape Dubai, which opens today.
“The key issue has to be the availability of funding and the ability and readiness of banks to grow their mortgage books,” said Simon Williams, the chief economist at HSBC. “Without funding, there isn’t a real estate market in the world that won’t be weak, including here.”
Banks in Dubai need to have the confidence to break the stalemate that is stifling liquidity in the sector, as well as start providing more affordable home loans, said Jonathan Bridges, a mortgage consultant with Globaleye.
While mortgage rates have dipped to 4.54 per cent in the US and 1.99 per cent in the UK as regulators adopted stimulus measures to encourage consumer spending and cut the cost of lending, rates in the UAE still hover between 7 and 9 per cent.
“It’s the risk factor,” Mr Bridges said. “Banks are still worried about how they’ll get their money back if customers default. That’s why we’re struggling.”
An oversupply of new homes and a declining expatriate population will also hamper early recovery. Even though many projects have stalled, the overhang will come mainly from projects that started construction in 2007 and 2008, and are now nearing completion.
A report by Deutsche Bank in June said there would be an oversupply of 32,000 units by the end of next year. Meanwhile, UBS bank said earlier this year the expatriate population in Dubai was likely to fall by 8 per cent this year because of redundancies. The Government has not given out any official data.
“There might be a big divergence from the data available, but a key message is that the market is oversupplied,” said Martin Kohlhase, an analyst at Moody’s Investors Service. “This is the central issue and we don’t see the supporting growth element at the same time.”
Still, despite many expatriates having left, Dubai’s property market is being propped up by a migration from the northern emirates among those seeking cheaper homes in Dubai, as well as by those working in Abu Dhabi but living in Dubai, added Mr Kohlhase.
There are also signs that companies are starting to hire again, which would help absorb the extra supply through people either buying or renting property, according to Mr Williams.
“If employment growth isn’t underway already, it will show itself by the end of this year and into the next,” he said. “Its not going to match the boom times of 2006-2008, but the trend will be upwards.”
The result of the downturn is that property is no longer going to control the country’s GDP, the most important economic indicator.
“We are entering a phase where the GDP will be determined not by real estate but by business itself,” said Jurgen Herre, the head of Middle East and North Africa for the US property company Hines Interests. “Real estate supports business and not the other way around.”
These changes to the dynamics of the market are having serious repercussions for the hundreds of development companies formed during the five-year property boom.
Whereas their business models were previously based on a continuous stream of off-plan sales, they are not having to look for alternative sources of financing for construction.
This is increasing the likelihood of a stream of consolidations among small private developers, said Chet Riley, an analyst at Nomura Securities. Already, several major consolidations have been announced including, most prominently, Emaar Properties and the property development arm of Dubai Holding.
“In the next six months, a raft of private developers are going to be squeezed to the point of liquidation,” he said, adding that the situation is threatening to spill over into the banking sector.
“The flow of systemic risk is moving from real estate to banking,” he said. “There could be another six months of pain from this.”