First with Financial Comment from Arabia

Nakheel and Limitless debt moratorium hits Dubai property

with one comment

Dubai’s global brand image took a big hit over the Eid Al-Adha holiday when the news that $26 billion of debt repayments at Nakheel and Limitless are to be suspended during a reconstruction process became exaggerated into a new financial crisis that might bring down the global banking system.

As the dust settled and the PR machine belatedly put the record straight, it is possible to begin a tentative assessment of what this debacle might mean for the already depressed Dubai real estate sector. Only last month commentators could highlight a few green shoots of recovery based on a little more local optimism about the business outlook.

Blow to confidence

That confidence has clearly suffered a setback. Indeed, the more pessimistic property market assessments – such as the latest report from UBS predicting a 30 per cent house price fall over the next 18 months, are bound to be taken more seriously now.

Another danger is that local interest rates may go up again as they did last autumn during the global financial crisis, if only to persuade rattled local investors to keep their money on deposit in the UAE. Interest rates as low as 6.5 per cent on mortgages had been one reason for increasing optimism this autumn.

There is also a particular problem now for owners of property built by Nakheel and Limitless. Will these companies continue to service and maintain buildings as promised? And will properties from this provenance now carry a ‘developer discount’ as a consequence of these debt problems?

In the short term it is hard to see the Nakheel and Limitless debt standstill as anything other than a negative for Dubai property. Longer term there is reason to be more hopeful, and grasping the debt nettle at this stage is arguably much better than letting this debt problem grow even bigger.

Restructuring challenge

It will all depend on what sort of restructuring emerges. For Nakheel and Limitless property owners there could be a beneficial change of management, for instance.

And for the wider market once the skeletons have gone from this particular cupboard then at least some of the worries over the outlook for Dubai in general and real estate in particular will be lifted.

The statements from the Dubai Government about this being a ‘commercial decision’ and ‘in the interest of all parties’ is correct in that regard. The Dubai real estate market will be a more predictable and better place for a restructuring at Nakheel and Limitless.


Written by Peter Cooper

December 1, 2009 at 9:43 am

One Response

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  1. ‘Debt moratorium’. I wonder if that will work when the Saint Tammany Parish (Parishes are called ‘counties’ elsewhere in the USA. Louisiana[and much of North America] was once French, and thus, very Catholic. Napoleon sold it to fund his European wars. The Catholic Church divides itself into ‘parish’ administrative area units) tax assessor sends me a bill for $1,200 next month? Maybe I can declare a ‘real estate tax payment debt moratorium’ on the internet during the Christmas holidays.
    I’ll bet the sheriff would sell this place at public auction in less than a year. But under Louisiana State Law, thanks to the Napoleonic Code, I would have 3 years to pay the real estate tax due, and reclaim the property! French laissez faire my friend. I’ll bet you can’t do that in Dubai.

    Bill Simpson in Slidell

    December 1, 2009 at 2:15 pm

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