Even though the Middle East property markets have been somewhat insulated from the ever worsening worldwide economic slowdown it seems as though investors have taken fright over the last few days as the European banking crisis gathers pace. Despite seeing more than $100 billion of new property developments announced over the last two days it seems as though market sentiment is turning. Is this a short term correction or the start of the end for the Middle East property boom?
On the same day that a Lehman Brothers survey suggested that confidence in the Middle East property market was very high amongst developers, investment managers and private investors alike, we saw many Middle East stocks collapse to multi-year lows. There is a general feeling that we may have seen the best of the property boom for the short term and after a period of swimming against the worldwide tide it seems that the Middle East property markets are now being swept in the same direction as those in every other corner of the world.
Why the sudden change in stock market sentiment?
One of the major issues which seems to have been brewing over the last few days is the likely forced merger of a number of major property developers in the area after conditions took an unexpected turn for the worse. If the rumours are correct then we could see United Arab Emirates officials force the merger of property giants Deyaar and Union Properties to avert a crisis of confidence in the two stocks and the local property markets as a whole.
After riding high on the crest of a wave for a number of years now it seems as though the rush for the exit door may not be too far away as investors look to protect what gains they have at the moment, retain liquidity and live to fight another day. There will be many who claimed that they saw this coming after massive investment into places such as Dubai but in reality the area has finally come under the cloud of the global economic downturn and the realisation that there will be less money available for investment in the region.
The next few weeks are vital to the short to medium performance of the Middle East property markets as investors will be looking for assistance from the authorities in the area. If investors fail to receive the assurances which they are seeking then there is every chance they will look to reduce their exposure to properties in the area and property investment funds. Are we seeing the demise of the so called invincibility factor of the various Middle Eastern property markets or just a short term blip?
Blip or crucial turning point?
People will argue that the rise in property investment and property development was always too much too soon, but up until now there has been more than enough demand to cover supply, with demand exceeding supply up until recently. While many still believe that the markets are set for long term growth there had been a feeling that 2010 would be the year when demand and supply crossed over with supply moving higher.
As we covered in one of our earlier articles, the very fact that many people had pencilled in 2010 as the turning point and a time to bailout would see the ‘clever’ investors look to reduce their exposure prior to the forecast bailout in 2 years time. Perhaps this is what we are seeing? Perhaps many investors are now using the global banking crisis as a reason to sell up and sit tight until the markets settle?
Whatever is really going on in the minds of investors and developers it looks as though the boom times in the Middle East property markets have hit the buffers for the moment. Of the $100 billion of new developments announced over the last few days it is highly likely that we will see many of these revisited over the short term and either shelved or delayed. Investor appetite is not there at the moment and if the banking crisis around the world was to worsen we could see some money flows to the region drying up.
How will property prices perform in the short term?
As sentiment takes a turn for the worse we are sure to see at least some softening of prices in the market as buyers become more selective and sellers look to recoup their investment as soon as possible. Whether the short term softening will turn into something a little more serious remains to the be seen as the forced merger of various property development giants may lead to some assets being sold into a weakening market to increase liquidity and repair any damage to their balance sheets.
However, unlike many other areas of the world we are likely to see some major intervention by local authorities throughout the region, aimed at shoring up the markets and trying to inject confidence back into the system. The ruling parties of the region have massive amounts of money at their disposal and are in a better position than most governments to move markets.
While over the next few days we will no doubt hear a lot of people repeating their claims that the markets were due a correction, the truth is that the vast majority of investors and observers bought into the short, medium and longer term potential for the Middle East property markets. Even though we seem set for a period of consolidation at best and a correction at worst, a lot of people have and continue to make massive returns on their investment in the region.
The short term realisation that no property market in the world can swim against the global tide forever is maybe not such a bad thing for the future. Perhaps we will see some investors take the regions property markets off the pedestal on which many placed them and come back down to earth.
However, those who have now written off the Middle East property markets as dead and buried could well regret their stance. Conditions may not be great at the moment but there is money waiting to go in at the right time, when prices come back to more realistic levels.