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The pessimists say that far too much property is under construction in Dubai to meet the likely immediate or future needs of the city, and highlight a doubling or even tripling of residential and office accommodation in the luxury bracket over the next few years. Where is the demand coming from, we do not see it, they argue.
Optimists are in the 'build and they will come' school. They point to Dubai's long history of making what seemed at the time fantastically ambitious investments that later paid off very nicely. For example, the Jebel Ali Port was considered a multi-billion dollar folly in the early 1980s but is the cornerstone of Dubai's trade today.
World-class infrastructure
Indeed, the optimists have a strong case. You can not have world beating infrastructure in a city without making a huge investment. And at least the investment in real estate being made in Dubai today is broken up into many projects and not as concentrated into a few schemes as in the past, thus one or two could fail without bringing down the whole edifice.
Yet the capital investment business cycle is a well established phenomenon in economics. There is a boom in investment and over-optimistic investment in some schemes and then a correction, shake-out and a slower period for business before investment interest picks up, and the whole cycle begins again.
The last downturn in Dubai real estate was in 1999-2000 after the 1999 stock market crash. It was well absorbed by the marketplace with landlords keeping apartments vacant rather than accepting lower rentals and capital values stagnated rather than fell.
Open market
However, the scale of real estate investment in early 2007 is much higher than in 1999, and the sector has been opened to foreign ownership. Therefore it is arguable that the market has changed from a closed model that could absorb a correction easily to an open one that will find it more difficult.
On the other hand, foreign buyers could now emerge in a real estate downturn in a way that was not possible in the past, particularly if they sense that the Middle East is about to shift away from its current cycle of violence.
Certainly if the international conference convened in Baghdad for March 10 proves a success then foreign interest in Dubai property is likely to grow, and then a correction in local real estate may prove far shallower that even the optimists believe right now.
Dubai could end up being the only city in the Middle East with the infrastructure to cater for a peace-driven regional investment boom. But that would still not eliminate a short-term real estate correction to absorb the likely oversupply of property next year.
Peter J. Cooper
