Will Middle East liquidity create a price spike in Dubai real estate?

When money is created it generally has to find a home. And what is known as global hot money, or free investment capital, is constantly in search of the best returns available around the world.

This phenomenon produced the Asian investment boom up until 1997, then the internet and telecom boom of the late 1990s and latterly the US and global property boom. Most recently there has been an explosion of share prices in China.

In Hong Kong the current stock market boom has come as a total surprise. This correspondent visited Hong Kong on a fraternal press trip earlier this year and talked to top local economists and found no sign whatsoever of the boom that was about to happen.

Economic forces

It is a much easier task to see the economic forces at work in Dubai property, which could produce a comparable liquidity-driven price spike.

First, local supply and demand of property is out of balance. There is a huge backlog of promised projects, and a large number of units under construction. But the actual delivery of apartments and villas is well short of current levels of demand.

Dubai finance company Tamweel correctly forecast the production shortfall for 2007 and is projecting a continued shortfall into 2008. Meanwhile, new residents continue to arrive in Dubai at the rate of 25-30,000 per month.

It is notable that the Dubai Government's latest housing mega project Mudon in Dubailand is for 3,200 affordable villas and 8,500 apartments aimed at meeting this demand. But full delivery is not expected until 2012, and on previous experience of project delays that might be optimistic.

Secondly, actual price levels of Dubai property are low in global terms if you make absolute comparisons of price per square metre, or in relative terms if you look at rental yields which are sky-high particularly for commercial space and apartments. Already local villa prices have risen to compress yields. But why should other yields be so out of line with global norms at a time of booming oil prices?

Economic reform

The answer is history. The Dubai property market was closed to all foreign buyers up until 2002. Today there are over a hundred developers and $200bn worth of property projects proposed or under construction.

However, it is not proposed or projected or planned property that drives a real estate market. It is what is available now for people to buy or rent. And it is this shortfall that will ensure Dubai property prices have only one direction to go.

Of course, the oil price could collapse as in 1999 and then all bets would be off for Dubai property. But if oil prices continue at high levels, as economists expect given the global shortage of new sources of oil and the rundown of existing fields, then Dubai property is a no-brainer for the global investor.

Will that fact of economic life produce a final price spike in Dubai real estate? Well, that has generally been the past experience of emerging markets at this phase in their cycle with property booms ending with prices rocketing to ultimately unsustainable levels. That we have not yet seen in Dubai.

See also:
Special Report: Buying Property in the UAE
People want more than dodgy deadlines when buying property