The Dubai Financial Market traded at 55% below its all-time high on the day this article was written, and started to its long fall almost exactly one year ago. Yet the local real estate market is still enjoying a boom which is stronger than ever following the recently decreed new Dubai property law.
If you turn to the emerging market business cycle model of Dr. Marc Faber, the celebrated investment guru and AME Info columnist, then a real estate bust will follow some 12 to 18 months after the peaking of a emerging stock market.
However, it may be different in Dubai. In the classic model a stock market crash will drain liquidity from a market, and bankrupt stock market investors will begin to sell property at fire-sale prices and bring real estate tumbling down. This does not appear to be happening in Dubai, quite the reverse.
Instead the new property law – which finally makes it 100% legal for foreigners to own real estate in Dubai – has resulted in a new inflow of cash into the market. For the time being this has more than compensated for the possible impact of the stock market crash, which is what a 55% fall in the DFM index must be termed.
The exceptional liquidity of the Middle East at a time of very high oil prices has come to the rescue of Dubai real estate. Indeed, stock markets have been crashing all over the Arab world in 2006, and real estate is the last local investment option for many investors.
Estate agents are smiling in Dubai at the moment. Projects such as the Jumeirah Lake Towers office towers that were slow to sell at the outset have now pretty much sold out. Re-sales in the secondary market presently happen very fast.
Developers have not been slow in bringing forward new projects to meet this new upturn in demand, many of them even taller and more ambitious than the previous projects.
Yet the awkward question to ask is still the supply pipeline in Dubai. As you drive across the city at night the lights illuminating the incredible number of towers under construction blaze into your eyes, and the reality of how just how many apartments, offices and shopping malls will be coming on to the market in 2007, 2008 and 2009 dawns.
Just how much property can a city the size of Dubai absorb? This is the problem. That past precedent suggests that Dubai is a special place, with a strong commercial base, is not in doubt. That past doubters have been proven wrong is also true.
But there is a caveat to the last statement. It is correct that in the long-run Dubai has always beaten its doubters. For example, Michael Field's seminal book '$100m-a-day' on the Middle East published in 1975 concluded of Dubai that 'when Sheikh Rashid dies it may lose much of its dynamism'.
In fact the sons of Sheikh Rashid have followed his philosophy of 'build and they will come' with huge success. But there will always be ups and downs for investors in such a vision, and surviving in the short-run is essential to long-term prosperity.