Optimistic report challenges the correction consensus on Dubai real estate

The Richville Advisory Group report sums up many of the most optimistic claims about the Dubai market and takes a very bright view of the future. However, even a cursory analysis of the numbers in this brief document should sound alarm bells to readers.

The report says 'Our expectation is that the population will actually double over the coming five years', and then notes 'We expect the population of Dubai to grow to 2.5 million by 2010, leading to an additional demand on residential units by around 480,000.'

Then the document adds: 'The expected projects scheduled for completion by 2010 do not exceed 500,000 residential units'. So nothing much to worry about there perhaps!

2010 outlook

Now let us first point out that 2010 is in fact three years away, and not five years, which is a major error. So will the population of Dubai double in the next three years to take up the forecast completion of residential property? Well, it is possible with mass immigration in a regional crisis but hardly likely and certainly not expected by the Dubai Government.

Besides, even if 500,000 new residential units were to be needed by 2010 how many people would be able to afford this sort of accommodation? The Dubai population profile includes a large percentage of workers earning low salaries, and this is often forgotten in the most optimistic projections about future demand.

Richville Advisory Group counters with the argument that 'almost 50 per cent of the demand for such high-end units actually comes from second home buyers'. That might or might not be true, but what about the other 50 per cent?

Government action

Then the report suggests several measures that the Dubai Government could take to support the market. Other market commentators such as Standard Chartered Bank have also noted that the Government could manage the market in a crisis but still predict a softening of prices.

The Richville suggestions are very contentious: automatic residency for buyers; making Business Bay a free zone; central bank changes to make mortgages cheaper and easier to obtain; and delaying mega projects while the market absorbs the new supply of property.

But you still have to ask yourself, is this going to be enough to provide the wealthy population required to occupy the new luxury property developments now being built in Dubai? If you do not think so then the inescapable conclusion is that the more pessimistic surveys predicting a significant market correction in 2008-10 are correct.