Will Dubai become the next Hong Kong for real estate?

It has to be said that the comparison between Dubai and Hong Kong is often made. Dubai is also a highly developed trading hub, a logistics centre for a wider region and has a skilled population comprised largely of hard working, recent economic migrants, as well as business-friendly free zones.

Dubai is developing its financial sector and would love to be like Hong Kong in this regard; tourism is another parallel, Hong Kong has its Disneyland, Dubailand is under construction. Hong Kong has low-tax rates, Dubai has none.

Hong Kong is a gateway to China, while Dubai is a gateway to the Middle East. It might be assumed that China is the bigger economy, and yet in terms of trade the US deficit with the oil producers is more than double its trade deficit with China.

Dubai boom dynamics

So with higher oil prices perhaps now here to stay, and even pessimists can only see a short-term decline on the horizon, then perhaps it is understandable why Dubai real estate has become such a magnet for investment.

However, the Hong Kong parallel is also interesting as a reminder that property has cycles and is not a license to print money. Hong Kong property surged in the run-up to 1997 and the handover from the UK to China but then collapsed by 50 per cent in the Asian Financial Crisis; and is only now firmly above the value levels seen in 1997.

Nonetheless, Hong Kong residential and commercial property remains expensive by comparison to many other cities. And if this is any guide then the long-term investor in Dubai real estate will be rewarded well. Hub cities have expensive real estate and so will Dubai as its property ownership reforms work through.

The difficulties could be in the short-term, especially in off-plan property schemes where speculation is rampant and the oversupply situation most severe. This is rather like the Arabian stock markets which got overheated and collapsed, despite the strong underlying economic fundamentals of the oil price.

Off-plan projects boom

For the promotion of off-plan projects could prove a house of cards, and in a crisis the exact situation of each project would depend on the strength of the balance sheet of the developer to carry a project through to completion. Those projects relying on future sales alone to finance construction would be eliminated by these market forces.

This might be a necessary part of the process to align supply and demand as there are probably too many developers launching projects right now. And as they say in stock market parlance, a correction or shake-out could be good for the market; that is to say to preserve the value of the existing Dubai property market.

What might prick the off-plan bubble? Well watch for global asset price falls and a decline in the oil price on the back of a US recession; that would change local investor sentiment and trigger a wave of consolidation of projects. But the long-term outlook is still excellent as Dubai realty will follow the Hong Kong pattern.