First with Financial Comment from Arabia

Bankruptcies and liquidations still likely in Dubai real estate

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Last week’s government rescue plan for its wholly-owned property group Nakheel should not obscure the fact that Dubai still faces a difficult recovery from its 18 month old real estate crash.

To date their have been no large bankruptcies or liquidations, and only a few properties have been repossessed by the banks. As in the rest of the world the local banks have been highly supportive of their clients in this crisis. But this is not a situation that can last indefinitely, globally or locally.


Put at its most simple there is always a point at which a client must go bankrupt. If they are hopelessly trapped with no way of ever repaying a loan then all that happens as time goes on is that the amount owed gets bigger and bigger as interest is not paid.

Consider the position of some of the developers of Dubai skyscrapers. They funded these projects with a mixture of off-plan sales and bank debt. Sales dried up. Bank credit ended with the crisis. The contractor walked off. So they have a half-finished tower, no money and no contractor.

What are they going to do? Well there is not much they can do, it is up to their banks to say ‘hold on, how are we ever going to get our money back?’ That can only happen if the project is liquidated and the assets sold for whatever they will realize in the market place. Even providing money to finish the project might just end up funding an empty building with even more debt.

Now banks are not stupid, whatever their recent lending practices might suggest. They will always try to delay a liquidation until the sale will at least recover what they have loaned. They are not that interested in whether anything is left for other parties.

Calling in loans

So the moment the banks can sense a market upturn they are likely to pull the plug and call in the loans from Dubai developers. It does not need a great deal of imagination – just by looking around Dubai at the number of stalled projects – to realize that this is a big problem.

However, it is very hard to see how it could be addressed without a substantial number of bankruptcies and liquidations. The government can summon up enough capital and rally the support of banks to save Nakheel, but can it really do the same for all the other developers now in trouble?

Sure it makes sense to cushion the blow and make this as orderly a process as it can be. But market forces will sort out the aftermath of a real estate crash far more effectively than a wider government support program, which is probably just not practical in any case.


Written by Peter Cooper

March 28, 2010 at 8:37 am

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