Future scenarios for Dubai real estate

Many visitors getting off an aircraft in Dubai take one look at the huge population of tower cranes, 30,000 according to one estimate this week, and conclude that a property crash must be imminent.

Yet the market forces that put all those tower cranes there in the first place are not about to disappear overnight and there are so many factors weighing in favor of the continued growth of Dubai that the pessimists are unlikely to be proven right anytime soon. After all, in markets timing is everything, and saying something long enough until you are right is just not a business strategy, let alone a way to buy a home.

For one thing, the Dubai property market continues to absorb the supply of property as it emerges, and rising rental and property prices this year confirm that there is still a shortage of accommodation in pretty much all categories.

Huge GDP growth

Last year the UAE was probably the fastest growing economy in the world with 26 per cent nominal GDP growth, and this dynamic is attracting a huge inflow of people. Everybody has to live somewhere and even a supply of property growing like mushrooms can not keep up, for the time being.

The real test for Dubai real estate will therefore possibly not emerge until this rate of GDP growth slows down. The oil price is still the key to the UAE economy, and any weakness here will flow through to the property sector. But the oil price is currently close to a record high, and geo-political instability is more likely to shift prices higher than lower.

The huge supply of property now being delivered in Dubai is actually very timely. Without this new space the city's rentals would have spiked to even higher levels that would deter new business activity, as has so often been seen before in emerging markets.

Growth dynamic

Indeed, real estate is now a large part of the dynamic UAE economy, and will help to sustain the booming economy in any oil price downturn. Moreover, much of this investment is from equity sources and not borrowed money, so it is unlikely to dry up and leave property uncompleted as happened in the Asian Financial Crisis of the late 1990s.

For the reality of the Third Great Oil Boom in the Middle East is that surplus wealth has been invested back into property development on a heroic scale.

If the oil boom ever goes bust this modern infrastructure will still remain to sustain the local economy. But in a world of scarcer natural resources is it not more likely that Dubai will become the even more sophisticated urban centre of an energy rich region; and possibly richer than Singapore or Hong Kong, with property prices to match?