Even though the Dubai property market has become friendless over the last few months there are serious concerns that we have yet to see the worst of the fall in property values in the region. A number of reports over the last few days have highlighted significant issues which have yet to be resolved and could get very much worse before they get better. It would appear that overseas investors are showing very little interest at this moment in time in the once prosperous Dubai property market.
There are a number of issues which are coming into play which include:-
UBS Dubai property report
A report by financial powerhouse UBS has highlighted the potential for further significant falls in Dubai property prices in the short to medium term. Indeed the company is suggesting that falls of up to 70% from the recent market high could still be on the cards with significant oversupply and lack of demand cited as very significant issues.
Even though Dubai property prices have fallen by 40% since the market high in the final quarter of 2008 it would appear that at least in the view of UBS the risk reward ratio is nowhere near the level required to tempt overseas property investors back into the market. While a fall of 70% from the recent market high would no doubt catch the attention of many property investors overseas there are other issues which need to be addressed before any significant improvement in property prices can be attained.
Dubai population set to fall by 10%
It is estimated that over the next two years we could see as many as 10% of the Dubai population return home as the economic recession continues to bite. While the figure of 10% may seem on the high side it is worth remembering that this is an economy and population which grew after the introduction of significant numbers of overseas workers, overseas investors and overseas businesses. A retrenchment of 10% of the total Dubai population does therefore not seem out of the question and it would cause a significant drag on any potential economic recovery.
Property vacancy rates could hit 30%
The same UBS report is forecasting that residential property vacancy rates in Dubai could reach a staggering 30% by the end of 2010 and again have a serious impact upon both the property market and economy of the region. It goes without saying that reduced demand will see landlords reduce their rent across the board which will then feed into a potentially lethal downward spiral where tenants hold the upper hand and landlords are held to ransom.
The reduction in the population and increase in property vacancy rates will also impact on businesses in many areas of Dubai which would then reduce consumer spending further, reduce income for the authorities and place the Dubai leaders in a Catch-22 situation. Do they let the economy bottom out and start again or do they invest more money, to be financed by debt, to inject new life into the economy?
Dubai government debt
As we have covered a number of occasions, the Dubai authorities have taken on substantial debt over the last few years in an effort to expand the economy, attract overseas investors and attract overseas businesses. Prior to the credit crunch and worldwide recession there was no doubt that this investment had produced significant results but there was always a concern that the authorities had taken on too much debt in too short a space of time. It is estimated that net debt is around the $112 billion mark although we have seen significant refinancing deals announced over the last few months which should at least take some of the short-term pressure off the authorities.
Oversupply in the property market
Despite the fact we have seen a significant number of Dubai property developers either exit the market or go out of business there is still substantial oversupply in the short to medium term. Properties are laying empty with their value literally falling day by day and unlikely to change hands in the short to medium term. Against this background of chronic oversupply, falling demand and a reduction in the Dubai population there seems little on the horizon to take away the pain being felt in the region.
This also offers another Catch-22 situation for property investors and property developers, who have the option to reduce their asking prices significantly in order to try and find buyers (creating a potentially devastating knock-on effect on prices), or else hold steady and try to battle through the downturn. However, when you consider the precarious finances of many investors and property developers in the region there are very few that will be able to retain substantial amounts of property, which are non-income producing and falling in value day by day.
Is the Dubai property market set to implode?
While there is no doubt that the Dubai property market continues to attract the attention of many investors around the world, few are willing to invest anything into property at this moment in time. As ever, past performance should not be considered when looking to the future as this can in many cases cloud your judgement. When you consider that the life blood of the Dubai property market, i.e. overseas investors, left the market some time ago it would seem that the foundations on which the property sector was built are now more shaky than ever before.
Even if the Dubai property market was to stabilise and potentially recover in the short to medium term there are many overseas investors who are nursing significant losses and a significantly weakened financial position in their home markets. Overseas investment in Dubai peaked during 2008 and is unlikely to reach those levels for some time, if ever again. Whether we have seen the best of the Dubai property market remains to be seen but the short to medium term omens are not good and despite the authorities trying to “gloss over” any potential problems many investors are already talking about the Dubai property market as a “busted flush”.
While it may be incorrect to call the end of the Dubai property market there is no doubt that increased government debt, reduced demand for property, chronic oversupply of property and the potential reduction of the Dubai population do not bode well for the future. The UBS report, one of many negative reports, suggests that we are just over halfway through the full downward cycle in the property market, which could see property prices fall around 70% from their recent highs.
Even though this article may seem something like a doomsday scenario there are many issues which need to be addressed by the authorities, sooner rather than later. If we were to see a significant sell-off this may attract bargain hunters but the substantial floor of overseas investment is in the past and there are concerns it may take some time to return.