First with Financial Comment from Arabia

Dubai real estate boom to continue until oil price falls

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Dubai house prices are still rising this year, and along with oil and food represent one of the last bastions of growth for investors. But the forces propelling Dubai real estate higher are very strong, and you have to look some way into the future to see an end. It must happen. No boom lasts forever. But some last longer than others.

You only need to look at UK housing to appreciate just how long a real estate boom can last. If my memory serves me right prices started rising in March 1993 and stopped rising last October, although it depends on whose data you prefer. So we are talking about 15 years.

Boom years

That is a long time, more than half a generation. UK adult owners have moved from youth to middle age in that time. In retrospect the end only came with a final bubble driven by low interest rates and a national mania for property ownership bordering on an obsession. Prices rose 180% in a decade and have nearly tripled since 1993.

In Dubai the freehold property market opened in May 2002 with the opening of the market to foreigners. Then prices on the first off-plan developments were sold very cheaply to get the market going. It was a little slow at first with prices doubling in perhaps the next four years, and doubling again since then.

However, property prices in Dubai remain considerably cheaper than in the UK and a fraction of London prices where post-tax income levels are comparable. Now the same financial services executives that drove prices sky high in London are being offered jobs in Dubai as an alternative to redundancy.

At the same time record oil prices are producing huge liquidity in the Middle East that needs to be recycled, or invested, back into the global economy. This means every sector of the UAE economy is enjoying super-charged growth. But there are not enough homes for all the people that want to live in the Emirates.

The real estate boom has certainly supplied a certain amount of accommodation but nowhere near enough to keep up with demand, so both rents and house prices have been spiraling upwards. But mistakes have been made.

Too many projects

For one thing too many projects have been launched at one time, meaning that nothing gets finished on time and every single project is running late. Secondly, what is being built is not necessarily the accommodation most needed. High-end luxury apartments are nice for wealthy bankers not your average Gulf executives.

Thirdly, a great many off-plan sales have been made to willing investors and speculators in projects that will now take many years to complete. And some of these projects are now failing because increased construction costs make them completely uneconomic. This will reduce the property supply chain, and cause investors to abandon off-plan schemes.

Furthermore as Emirates Business reported yesterday contractors no longer take part in tenders, all prices are negotiated. Construction materials are up by 30 per cent or more in price over the past year.

So projects that are being built are running late, and the economic viability of some ambitious schemes is being threatened by inflation. It all sounds like a construction boom choking on capacity and cost constraints.

But translated back into the marketplace for housing, and for that matter commercial property too, this means supply shortages will persist for much longer than envisaged in some previous forecasts. Already completed property is harder and harder to find in Dubai, partly because buyers do not want to sell in a rising market and mainly due to a huge backlog of construction delays.

Market forces

Market forces will now ensure a solution by driving up the price of completed units to the point that more projects do become financially viable, assuming that all the units were not sold in the first place at low prices. Typically developers insure against this problem by holding back units until later stages of construction, although there have already been cases where this practice has been ignored with disastrous consequences.

Add into this mixture the falling cost of home finance in Dubai, thanks to competition among local lenders and falling US interest rates to which the UAE is pegged, and you have all the ingredients needed for a further upsurge in house prices.

Could this be the final spike in a multi-year house price boom? Well, we can be sure it is a further upturn, whether we can yet draw a date on the end to this process is less sure, and would depend on taking a view on the oil price outlook. There is no consensus on oil prices at the moment.

A big fall in oil prices would hit Dubai with a six month time-lag as it did in 1998-99. But if the oil boom remains in tact there is no reason to think that the Dubai real estate boom will not prove as long and as durable and as highly priced as the one that has just come to an end in the UK.


Written by Peter Cooper

April 16, 2008 at 5:19 am

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