The newswires in Dubai have been dominated over the last few days regarding speculation of further job cuts in the property development market. Despite significant job cuts just a few months ago it appears as though the sector is set to undergo a further round of “bloodletting” as demand for property continues to fall. So what exactly is going on and what does this mean for the future of the Dubai property market?
As you would expect, the likes of Damac and Nakheel appear to be leading the way with significant redundancies announced and expected in the future. Nakheel has already reported the loss of 500 jobs in the region as part of a larger restructuring of the business which needs to be downscaled in order to reflect the difficult market conditions at the moment. Rumours are also abounds with regards to Damac amid suggestions that over 150 positions are under threat today.
So what does this mean?
It is common knowledge that the Dubai property market attracted a seriously high number of property developers to the region in the boom times. Now that the property market has peaked and fallen back in line with the worldwide property market a number of the smaller operators have already gone under and the larger companies are being forced to reduce their staffing levels and base costs to reflect this new age in the marketplace.
While obviously the impact upon those losing their jobs is serious, in the longer term there is no doubt that the Dubai property market was overcrowded and in need of serious cutbacks. This “bloodletting” is always difficult in the short term but part of the natural cycle of a growing property market now going through something of a consolidation phase. Even if the ongoing worldwide recession had not kicked in, at some stage the market would have fallen back naturally. However, there is no doubt that the “consolidation phase” we are seeing at the moment is a lot more severe than it would have been in normal market conditions.
Why has the reaction in the marketplace been so severe?
Apart from the fact that we are going through an economic phase which nobody had ever thought would arrive and nobody quite knows how to handle, the Dubai authorities have come in for severe criticism for trying to mask over the problems, which were apparent some time ago, and continue life as normal. In hindsight it was obvious that the property sector would suffer as soon as the banks withdrew the vast majority of liquidity from the finance market, leaving buyers struggling to raise funds and sellers more and more desperate to get out of the market.
As the pressure within the market reached boiling point something had to give, and with buyers falling by the wayside sellers were forced to push prices lower and lower as they became more desperate to raise funds to survive. This self-fulfilling prophecy also saw new developments losing their value on a daily basis and many developers dumping stock prior to closing down their operations and in some circumstances withdrawing altogether from the region. A slow trickle of sellers soon grew into a substantial snowball effect which has had a serious impact on property prices.
Looking back, when the market was booming nobody was too concerned about the influence and changes being introduced by the local authorities, although since the market has collapsed the authorities have become a focal point of criticism by many in the property development field. However, those criticising the local authorities need to appreciate that Dubai is still a relatively immature property market and leaders in the region have never come across such an economic downturn as they are experiencing now and in many ways do not know how to react. Differing signals from the authorities and from the financial institutions in the region lead to panic amongst investors which exaggerated an already difficult situation.
Is this the end of the Dubai property market boom?
There is no doubt that the short to medium term outlook for the Dubai property market is difficult to say the least with many property experts forecasting more job losses during 2009. In many ways these downsizing exercises have been long overdue with companies growing too large too quickly in a market which in hindsight had been pushed to unsustainable levels by a mixture of domestic and international investment.
However, even though the Dubai economy is set to slow during 2009 and 2010 the basic elements of a profitable and sustainable economy as well as a successful property market are still there and once the worldwide economy picks up interest will no doubt return. Those who are expecting a sudden return to the boom times of 2007 and 2008 may be sorely disappointed as investors are sure to take a more cautious approach to the market during the next “bull run”.
The immediate outlook for the Dubai economy
The financial sector will play a vital role in the future recovery of Dubai as this is the food which feeds the animal which is the Dubai property market. When the major financial institutions in the region decided to withdraw their liquidity to the market this was the catalyst for a serious rethink by many property developers and property investors in the region which has seen the sector fall substantially in a relatively short space of time.
There will obviously be a knock-on effect to the economy as the number of redundancies continues to rise in both the property sector and other areas of the Dubai business world. The authorities will have a major part to play in stabilising what is a difficult situation and one which the region has yet to experience during its short life on the international investment stage. Once liquidity returns to the financial markets this should take some pressure off both the local population and businesses in the region, with both able to start looking ahead to the future.
While this is “Dubai property layoffs – round 2” do not be surprised to see further redundancies in the short to medium term as companies scramble to reduce their cost bases while retaining enough staff and expertise to stay in business. These are difficult times for the region but those who are calling the end of the Dubai property market may well eat their words in due course.