Abu Dhabi property and the global credit crunch

At present such is the backlog of projects in the UAE capital that physical constraints such as obtaining men and materials are far more significant problems than arcane changes to the cost of funding.

Indeed, money has never been a problem in Abu Dhabi, and with the oil price comfortably around $70-a-barrel the problem is more how to invest it fast enough than raising more in bond markets.

However, the development majors like Aldar and Sorouh do have to operate on a commercial basis and make the best return for their share holders by levering equity. Therefore, the global credit crunch means a recalculation of their development finance, and ultimately that could mean trimming projects to meet smaller budgets.

Oil prices

On the other hand, the real impact of the global credit crunch could be something that will be very much more of a problem to Abu Dhabi: this crisis could spill over into the real economy and produce a global recession, and that would mean a lower oil price.

Who can forget the Asian Financial Crisis of 1998 and the oil price of below $10-a-barrel? It is unlikely that Opec will repeat its then policy error of boosting production at a time of falling demand, but the history of oil booms is that they generally end by causing a global economic slowdown which lowers demand for oil, and hence the oil price.

Abu Dhabi has huge financial reserves and could afford to keep on building regardless of the oil price. But as with the global credit crunch, financial planning is never entirely immune from tighter liquidity.

Global economic downturn

Besides, Abu Dhabi's own sovereign investment funds would be hit by a global economic downturn, and the dividends on an estimated $1trillion reserve would be trimmed and its value diminished.

In these circumstances a thorough re-evaluation of spending priorities and a consolidation of projects would be the normal policy response.

If nothing else, the resolve of the authorities would be greatly tested: for it is far easier to explain the rationale behind massive expansion plans in good times and less easy to understand why huge schemes are going ahead when the demand looks less insatiable for property.

All the same, the reaction of a rich family compared to that of a poor (and indebted) family to harder times are very different: The rich can take advantage of cheaper contract prices and building materials, while the poor go bankrupt. Abu Dhabi is clearly in the former category.

See also:
Gulf banks dispel US credit crunch
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