Thursday, July 10, 2008

Dubai faces property glut

The prospect of being unable to stimulate sufficient demand for the massive projects due to come on stream in Dubai is the biggest challenges facing the emirate’s property sector over the next year or so, a new report says.

The report, published yesterday by Fitch Ratings, said a record-breaking number of new homes are due to come on to the market next year and in 2010, leading to a situation where supply far outstrips demand.

Residential property in Dubai averages about Dh1,579 (US$434) per square foot, but oversupply could lead to a drop in prices.

“If supply exceeds demand, prices of property would fall, thereby reducing expected revenues, which in turn could have an unfavourable effect on a developer’s credit profile,” the report said. The report also predicts an oversupply of office space in the next couple of years.

“Contingent to delivery plans being met, the market may start experiencing a price correction as a result of the massive new supply in 2009–2010,” the report said.

Although Dubai has a population of 1.6 million, the emirate is constructing the same amount of office space as Shanghai and Moscow, which have populations of 20 million and 10.4 million respectively.

However, as developers and contractors grapple with labour shortages and the escalating cost of building materials, project delays or even cancellations could narrow the gap between supply and demand.

The Fitch report said that foreign demand would also be hit if there was a deterioration in political relations with other countries in the region.

“A geopolitical deterioration or a real estate downturn in Dubai may have an impact on the foreign demand, and could be more damaging to the economy than the correction in stock markets which took place in 2006,” the report said.

Dubai’s property sector might also feel the impact of the credit crunch and subprime lending crisis that has hit the UK and the US, due to the fact that most of the demand for property in the emirate is driven by expatriates and foreign investors.

But according to Bashar al Natoor, an analyst at Fitch Ratings and the author of the report, most expatriates will still be attracted by Dubai’s property market as their own standard of living improves.

“Many of the buyers are working and living in Dubai, so at the end of the day their job prospers as the region prospers,” said Mr Natoor.

Dubai’s ability to maintain its leading position over the next few years will also be tested with the emergence of new property centres in the region, such as Abu Dhabi and Doha.

“Abu Dhabi and Doha are emerging, but Dubai has a certain advantage: many large companies have established their regional offices here and that will be hard to change,” said Mr Natoor.

“This will act positively for Dubai in the future and a lot will need to be done for others to catch up.”
The report predicted strong revenue growth for developers in Dubai but said that there could be more delays due to labour and materials shortages.
About 50 per cent of Dubai’s upcoming property stock is either fully or partially-owned by the government, which could work to the advantage of the sector in the event of a market downturn.
“The large state-owned developers are likely to retain better access to raw materials and labour than smaller developers,” the report said.
The report also called for more transparent data to help investors and developers mitigate risk.
“Compared with Western markets there is little transparency or reliable sector data in Dubai’s real estate market,” said Mr Natoor.
“But the Dubai government is moving forward with this; it is producing tools such as a price index, and has introduced escrow accounts and other measures, which will act to mitigate this risk in the future.”

By Angela Giuffrida

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