Who to blame for the Dubai property downturn

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As the Dubai property downturn gathers pace many people are speculating with regards to the underlying reasons for the sudden disappearance of confidence in what had been one of the more buoyant markets of recent times. Even though we are currently in the middle of a significant worldwide economic downturn there is speculation that other factors have come into play over the last few months.

Food for thought

A number of factors have been suggested on a thread entitled “Who to blame for the current downturn” which include:-

Developers selling off plan with enormous markups

As the Dubai property market continued to roll forward with increasing demand and less and less supply, many developers took the opportunity to increase the asking price for a number of off plan developments. With little supply in the market many people took up these opportunities with many effectively dealing blind into the future. Now that the market has turned, a number of property investors have been left with assets which have reduced in value and many of which are unfinished. A number of investors and developers have recently been attempting to sell these assets at “distressed prices” which has caused a significant shift downwards in general pricing trends.

Developers advertising for overseas property investors

As the phenomenon which was the new Dubai property market gathered pace there was significant interest from many areas of the globe which developers used to their advantage. As the market continued to rise many investors felt as though they were missing out and would do literally anything to get a foothold in the market. This led to not only inflated demand for a market which was already struggling on the supply side but again allowed developers to instigate substantial competition which pushed prices higher and higher.

Government inactivity to balance the supply and demand in the market

This is a controversial suggestion on the thread as many people believe the government has been very proactive in attempting to curb demand and increase supply in the marketplace. However, in the early days when the market was fairly immature it was apparent that the authorities were happy to see a new and prosperous property market advertised all over the world. The interest from all areas of the globe even took the authorities by surprise and by the time they began to react to curb demand and increase supply (via various price caps and building initiatives) the market had already begun to run out of control.

The strategy of Dubai property agents in the region

While many investors have blamed property agents in and around Dubai, and their counterparts in property investment hotspots around the world, in reality agents are there to drum up demand and push through as many transactions as possible in the good times. Whether some of the strategies and sales literature used to advertise and promote the market were more upbeat than they should have been is debatable but with a never ending stream of potential investors the property agents in the area were inundated with enquiries, many of which proceeded to actual investments.

The RERA has been blamed for protecting property developers

In the early days of the Dubai property market the RERA was never realistically in a position to serve the interests of property investors and property developers as the market took off. Initially the authorities needed property developers to supply the market and many believe the RERA were overprotective of developers possibly at the expense of property investors. This allowed many property developers to increase their exposure beyond reasonable levels and many found themselves overextended when the market started to turn. Now the RERA is moving more towards the protection of property investors but for many, this has come too late.

The worldwide economic downturn

While there is no doubt that the worldwide economic downturn has impacted upon the Dubai property market, initially there had been hopes that the market would serve as something of a safe haven in troubled times. However, as the credit crunch continued to sweep around the world it became clear that investment funding was coming under pressure and this eventually hit the Dubai banking sector. This sudden realisation that the market was not immune from the downturn of the worldwide property market hit many investors and developers hard and resulted in a number of fire sales at distressed prices. This in turn placed pressure on overall property prices in the region and the supply/demand balance finally tipped towards excess supply and falling demand.

Summary

These are just a few of the factors which some investors have cited as reasons for the sudden reduction in interest for the Dubai property market. In reality the worldwide economic slowdown has been the major factor behind the fall in property prices in Dubai but in hindsight it looks as prices were pushed too high too soon when the boom was in full flow. The sudden realisation that the market was not immune from the general property downturn around the world appears to have hit some developers and investors hard causing a reduction in confidence in both the Dubai property market and the Dubai economy in general.

Aside from the worldwide economic slowdown it could be argued that “over exuberance” on the upside has exacerbated the fall in property prices and made a difficult situation much worse. Prior to the fall there had been a consensus that the supply/demand balance would equal out in 2010 and many property investors had already been looking to dispose of their assets before this “crossover point”. However, as the trickle of sellers gathered pace, with those sitting on large profits keen to liquidate their assets, we saw pressure on the selling side which was not taken up on the buying side.

Conclusion

As with any market which has gone through a significant boom period there is much negativity and concern after this stage of development has ended. However, Dubai is a strategically important area of the world for both business and property investors and many expect the local economy and property market to rebound strongly as and when the financial crisis gripping the world comes to an end.

The search for “blame” for the fall in the market continues, but as ever there is no simple answer aside from the fact that the worldwide demand for property has reduced significantly of late. No market in the world is immune from a global downturn no matter what property agents and property developers may suggest.

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