The Dubai stock market received an unexpected lift yesterday with news that the Dubai authorities had managed to negotiate the sale of $10 billion worth of bonds to the United Arab Emirates in a bid to reduce the pressure on the Dubai authorities. The bonds carry a coupon of 4% but more importantly they will be used to increase liquidity within Dubai where ambitious expansion plans have come back to haunt the rulers of the region.
The uplift in the Dubai stock market was both unexpected and welcome but there is some concern as to whether there will be any follow-through from the investment community. While this is part of an ongoing $20 billion refinancing of the Dubai authorities this is only a fraction of the debt which has been built up over the last few years. Will this mark the bottom of the Dubai property market or a chance for investors to sell?
The Dubai property market
There is no doubt that Dubai has been THE main property market over the last few years having attracted substantial investment from both overseas investors and domestic investors. Even as the worldwide economic downturn was beginning to hit home in the likes of America and the UK there was even talk that the Dubai property market was in some way “immune” from the problems of the world. Unfortunately this rose tinted view of the Dubai property market proved to be well short of the mark and we have seen a collapse in property prices and credit lines over the last few months.
While there have been some attempts to both refloat and replenish the Dubai economy we have seen the property market bear the full brunt of the downturn in the region. The substantial rise in property prices in many areas of Dubai has been lost with many properties now available at levels below which they were purchased prior to the property boom in the region.
So will the $10 billion refinancing by the Dubai finance department really spell the end of the property downturn?
The optimists point of view
There is no doubt there is still a demand, albeit on the sidelines, for Dubai property as and when prices start to level out and investors return to the market. The $10 billion bond sale to the United Arab Emirates is part of a wider $20 billion refinancing package and shows there is demand for Dubai debt even in these troubled times. This will take some pressure off the growing debt mountain which has been accumulated over the last few years ahead of and after the property market boom.
While nobody is really suggesting that investors will flow back into the market in the short term, the $10 billion fundraising gives the Dubai authorities a little more leeway as they look to try cushion the blow of the property market downfall. It was interesting to see a bounce in local share prices with an apparent return of investor appetite for both property shares and Dubai shares in general. This additional funding also gives the Dubai authorities further finance to support the property market, economy and individual companies who play a major part in the region.
The pessimists point of view
The Dubai property market has suffered from a number of factors including substantial domestic and international investment at property prices which were unsustainable, the inability of local authorities to cool demand even though the market was overvalued and a substantial reduction in credit lines in the region. This is before evening contemplating the ongoing worldwide economic slowdown which has seen a significant number of overseas investors, with interests in the Dubai region, attempting to repatriate their money.
The $10 billion fundraising, while welcome, is but a fraction of the massive debt which has been built-up by the authorities over the last few years. Even if the authorities were to raise the extra $10 billion which has been suggested, again this would only account for a fraction of the ongoing debt pile and still leave very little room for investment in the economy. The chances are that many investors who have been hit hard by the fall in the local stock market will use the short-term rise yesterday to reduce their exposure to the property market and the Dubai region as a whole.
The consensus opinion
There is no doubt that the $10 billion fundraising, in conjunction with the United Arab Emirates, has offered an opportunity for the Dubai authorities to reduce their debt burden but this is only a small fraction of the total debt. The additional $10 million which is being mentioned would help to give the authorities a little more breathing space but will it really be enough to see the property market and the Dubai economy bottom out?
In reality, as long as the worldwide economy is still struggling there is little likelihood of any substantial improvement in the Dubai, or for that matter any of the major worldwide property markets, in the short to medium term. The Dubai market was built up to such a level that prices were unsustainable and we would have seen a fallback in due course even without the credit crunch and ongoing worldwide economic difficulties.
Short to medium term there may be further downside in the Dubai property market but longer term there is potential for significant growth. International investors still appear to have an appetite for assets in the region and western businesses are still very much present and set to play a major part in the local economy.
While there is no doubt that the fundraising, and the potential for an additional fundraising, has offered the first bit of good news for some time this needs to be taken in context. At this moment in time the Dubai property market is operating on a reduced credit line and reduced demand from both domestic and overseas investors. Against this background there is little likelihood that the market will buck the worldwide property trend in the short term although the potential in the longer term appears clear to many.
It is highly likely that stock market investors will use the recent upward spike in share prices to reduce their exposure and raise their liquidity levels in order to alleviate their own financial concerns. However, if the consensus view is wrong and investors in the Dubai stock market continue to push prices higher then we may see a recovery much quicker than many are forecasting.
All in all the clever money is on further downside in the short term and a medium to longer term recovery in both the stock market and the property market.