Real estate correction is the next GCC business challenge

You do not have to be long in the GCC to see that a construction boom is evident. The volume of investment in real estate has ballooned over the past five years as has the number of companies operating in this sector.

Figures from the Dubai Chamber of Commerce show that in 2006 construction and real estate together grew by 31 per cent over 2005 and accounted for 24 per cent of the emirate's GDP of $46 billion. For the UAE as a whole real estate and construction accounted for 15 per cent of its $164 billion GDP.

This is clearly a capital investment cycle driven by record oil prices, and the ability of the UAE to create a focus for real estate investment based on political and economic stability during a troubled period for geopolitics in the Middle East.

Healthy corrections

But it is a healthy phenomenon of business cycles that they periodically undergo corrections to purge the market of weaker participants and consolidate the gains of the boom.

Sometimes real estate markets correct because they reach a tipping point due to oversupply, sometimes there are external economic shocks such as interest rate rises and commodity price changes, and sometimes domestic economic factors like inflation and even traffic congestion.

The real estate studies on the Dubai market from EFG Hermes and Standard Chartered Bank have concluded that oversupply will become a factor in Dubai from later this year onwards. Interest rates are still on an uptrend globally which makes borrowing to buy property more expensive, and average oil prices are lower this year for the first time this century.

Meanwhile, the GCC economies have been dealing with some of the world's highest levels of inflation and traffic congestion in cities like Dubai and Doha has become a serious concern.

What next?

The question then does not seem to be 'will a real estate correction happen?' but 'how will it play out?' That is not too clear.

The Economist has forecast a slowly deflating local bubble and that is to be hoped because real estate and construction has become such an important factor in most GCC economies.

A sudden rupture in this balloon would leave many small and large investors out of pocket and some of the projects half completed. Clearly the authorities are likely to take a proactive role in managing and consolidating this process but the painless deflation of a property boom would be a unique achievement.

The more usual pattern in a real estate correction is for winners and losers to emerge, with the last investors worst hit and for some developers to vanish all together. For not every participant can expect to be part of the consolidation and recovery process that follows a real estate correction.