Would a real estate crash in Dubai hurt Abu Dhabi property?

It remains to be seen whether Dubai property can pull off the Goldilocks scenario of a soft landing with supply neither to hot, nor too cold to meet demand in the next few years. But in Abu Dhabi people are beginning to express concern about the knock on effect if Dubai were to suffer a real estate crash.

What would such a hard landing involve? Well, a sudden loss of confidence by buyers leading to a sharp increase in the inventory of unsold completed and off-plan property; the failure of a few developers whose projects would fall short of the required sales; and a sharp decline in rents and selling prices.

This is after all the typical economic cycle of the real estate industry. It has been noted time and time again in mature and emerging markets, and reflects the capital cycle of physical assets like real estate. The huge liquidity of the UAE could certainly distort this cycle for a long period, which is why commentators avoid market timing, but bucking the market over the long-term is impossible.

What if?

But this is really another argument. The question on the table here is what impact would such a slump, if it happened, have on neighboring Abu Dhabi whose development plans are starting to rival Dubai's in scale.

First, it has to be said that the supply situations in the two cities are completely out-of-phase, while demand pressures are strong in both places with severe upward pressure on rentals. Thus Abu Dhabi would proceed with its plans for new supply to meet demand, while Dubai would have to slowdown.

Secondly, a real estate crash in Dubai would tend to dampen speculative interest in property buying in Abu Dhabi. That might persuade Abu Dhabi developers to look at pricing and marketing incentives in response, and could lower price expectations.

Thirdly, it could be that the roll-out of Abu Dhabi projects moved at a slightly slower pace because the example of overbuilding in neighboring Dubai.

Limited contagion

However, the development of an active privately-owned property sector in Abu Dhabi is subject to local laws and the local conditions of supply and demand. Thus any impact on the UAE capital city's real estate sector from a correction in Dubai would be negligible.

Indeed, if a more sober atmosphere prevailed among investors this might actually result in a better long-term business climate for real estate developers than a dramatic boom-to-bust cycle.