Don't Believe The Dubai Hype, Good Or BadThe UAE economy is sliding, but it's not Armageddon.

Posted in Broader Middle East | 25-Feb-09 | Author: Eckart Woertz

Dubai skyscrapers and under construction buildings in 2008.

Media follows fashion dictates. For many years glossy magazine stories about the high life in Dubai were the only journalistic diet one could get. Now the tide has changed and the flavor of the month is doom and gloom stories about Dubai the ghost town, where traffic suddenly moves freely and people leave unpaid-for cars at the airport with maxed out credit cards in the glove compartment.

There is some justification for this: A recent HSBC report sees average price declines in real estate of 23% in Q4 2008. It is in line with anecdotal evidence and more credible than another report by Colliers International, a real estate company, that speaks of 8% price declines over the same period. Even rents have started to come down after having been a major contributor to inflation over recent years.

Sales of so-called "off plan," or unbuilt, properties, that only required a down payment and were flipped many times before a single brick was laid, have come to a virtual standstill, as buyers recognize that leverage works on the upside, but it works on the downside as well. If many people cannot pay follow-up installments, they are forced to sell in a now illiquid market, or the developer gets back a foreclosed off plan property without the possibility of reselling it to raise the remaining finance for completion of the project. This, in turn, can be disturbing for people who still own off plan units and are eagerly awaiting the day of completion. A litigation wave is conceivable, and Dubai's Arabic-speaking juridical system might face problems handling large quantities of cases that involve many non-Arabic speaking foreigners.

Non-resident foreigners from neighboring Gulf countries, Iran, Russia, India, Pakistan and Great Britain easily formed two thirds of the market. Now oil prices are down, recession and currency weakness have hit the respective countries, and there is no bull market any more that could suck international investors into the game.

Domestic demand will hardly pick up the slack: UBS speaks of the possibility of a population decline of up to 8% in 2009--an insult to a city that aimed at having 5 million inhabitants by 2020, up from an estimated 1.6 million today. There are reports that about 1,500 exit visas are being stamped every day, but extrapolated over a year this would be about half a million, and frankly a bit rich.

And here enters the caveat about fashion dictates in the media world: Journalists, who were ready to discuss feverish dreams about Dubai as a global capitalist role model only a few months ago, now see the end of Dubai on the horizon. They might be wrong again. Sure, we have not seen large volumes of distressed selling yet, and it will get worse before it gets better. But real estate and construction companies like Emaar or Arabtec now trade below book or even cash value, which either signals general financial Armageddon or stocks with some long-term appreciation potential. The time ahead will undoubtedly be a sobering experience for a city that has been so infatuated with superlatives, but in one or two years' time some smart money will have a second look. If push comes to shove, oil and cash rich Abu Dhabi will help Dubai out as well, although for a price. On February 23, Dubai raised $10 billion by selling a five-year bond issue to the UAE Central Bank in Abu Dhabi.

Dubai has reached a critical mass and has positioned itself as a trading and service hub in an oil rich region, and so it will not vanish into the sea. Oil prices will go up again over the coming years because of supply constraints, even if demand remains sluggish--$100 a barrel is a distinct possibility, as the International Energy Agency recently opined in a stern warning. Singapore's real estate market went down 80% in the wake of the Asian crisis and that city is still there as well.

(First published in Forbes, February 24, 2009)