Is Gulf property in bubble trouble? (page 1 of 4)

In many parts of the world, a queue of people waiting outside a sales office in the full heat of summer would have heads turning. A jostling crowd brandishing bundles of banknotes might mean that some elusive concert tickets have gone on sale, or perhaps that a promising IPO is about to be launched. But this is Dubai, and this queue is neither unusual nor caused by an entertainment event or share offering.

The public appetite for low-risk, high-growth returns has been whetted by a marketing machine promising an investment "no-brainer," and the offering is a selection of two- to four-bedroom apartments that haven't even been built.

"I am waiting here because I believe these apartments will be a good investment for the future," says a middle-aged Asian man in the line. "I just hope that there are some left when I get inside."

Emblematic of the fast pace of change in the economies of the Gulf states, construction work has itself become one of the constants of daily life. From tower blocks to luxury hotels, shopping complexes to multilane highways, armies of builders toil day and night to meet the deadlines set by governments and private developers. Construction investment in Saudi Arabia alone is estimated to be worth $18.5 billion annually.

While record oil prices and the consequent surplus liquidity in the public purse are driving much of the boom in infrastructure investment in the region, new power stations and water desalination plants aren't built speculatively.

Their purpose is to meet either existing or projected demand, and although the same can be said of residential and commercial developments, the crucial difference is that developments outside the public domain are subject to the vagaries of cyclical supply and demand economics. This means that with every boom comes a bust, which in turn begs the question of just how long the good times can be sustained.

The Gulf Cooperation Council states are expected to experience real GDP growth of 4.2 percent for 2004, according to Saudi Arabia's Al Rajhi Banking and Investment Corp., but this is projected to decrease to 3.3 percent for 2005. Although weaker than the global average, this pretty much puts the Gulf countries on a par with the United States (4.3 percent for 2004 and 3.5 percent for 2005).

In its latest report on US house prices, the Office of Federal Housing Enterprise Oversight (OFHEO) found that the average price of an American home rose by 9.36 percent from the second quarter of 2003 to the same period in 2004. "This appreciation," says Patrick Lawler, OFHEO's chief economist, "is the largest four-quarter increase since 1979."

Some economists are arguing that US consumer spending is being driven by higher house prices rather than higher incomes, as Americans are deluded into believing they are wealthier by the nominal increase in the value of their homes. This would suggest that the US is heading towards a residential real estate bubble, wherein the market price of a property deviates from its fundamental value as house prices outpace the wealth that the country is actually generating.

When attempting to apply the same logic to the Gulf states, however, one soon finds the marketscape to be very different. For one thing, comparative data is hard to come by as the different markets demonstrate widely differing degrees of demand pressure, availability and liberalization.

What's more, the multitude of new residential developments underway - from Bahrain's Amwaj Islands to Qatar's The Pearl and Oman's The Wave - will usher in a new era of offshore residential property that is hard to value against traditional onshore properties and that will also be open to foreign ownership.