Dubai has been hit by two financial crises in the last six months, which have combined to bring the emirate's real estate market to a crawl.
As well as the current global credit crisis, Dubai has suffered from its own run on liquidity based around the hype surrounding the dropping of the dollar peg.
Rumours of a possible revaluation caused a number of global investors to speculate on the pegs, bringing billions of dollars into the UAE and, in turn, creating an influx of liquidity and allowing banks to lend at very attractive rates, Ali Al Shihabi, CEO of Rasmala Investment Holdings told delegates at the monthly Dubai Property Society meeting.
When the central banks put an end to speculation by issuing repeated denials, these speculators pulled capital from the region. By July the market was suffering from a major lack of liquidity, causing tightening in lending criteria, and by August, the emirate was undergoing its own mini credit crisis.
The global crisis being felt by countries across the world, has further compounded the problem by causing local markets to plummet and regional investors to question local stock – especially the real estate shares that prop up Dubai's economy.
Finances available for ongoing projects
The lack of demand currently being felt in the market is a result of these factors; investors now hold back, fearing further drops in prices, and banks are refusing to lend.
'Properties that have broken ground will continue to be supported,' Al Shihabi said. 'The top priority is meeting existing commitments, and the government has given money to the banks to continue existing projects. The value of this sector will hold, after a slight drop, and you may see a limited amount of trading, possibly at a discount, by those that are in urgent need of realising their assets.'
'Developments that are only on paper are still a huge chunk of the city's projects, and that has died for the time being,' Al Shihabi warned. 'Even the big developers, the Emaars and Nakheels, will have huge problems getting financing, and what is offered will be very expensive. A lot of projects are going to be scaled down or stopped.'
Despite this Al Shihabi said that regional investors should not be unduly worried about the state of the property market. The governments in the GCC have stockpiled cash reserves from oil revenues for the last five years, meaning that the economies are able to absorb any downturn. The problem is that this has not been properly publicised.
'One of the reasons for investor confusion is because the political, financial and business leaders have not known how to correctly communicate the strength of the economy and the measures that have been taken to protect the market,' Al Shihabi said.
The silver lining is that the slowdown has had the positive effect of cutting down on the rampant inflation levels, which had accelerated over the past two years. The market was overheating and being ground down by constant increases in the prices of raw materials, labour and contracting costs. These should now return to stable levels.
Overly-hyped project launches
Dubai has also been suffering from an excess of bad marketing decisions leading to overly hyped project launches. Though the property market has stable foundations the impression being given was one of unrealistic expectations, which ended up damaging the sector's image abroad.
'Everything was the biggest, the tallest, the grandest, and people didn't take the Dubai market seriously,' said Al Shihabi.
'The latest example was at Cityscape: Everyone knew that the world had changed but we came out and said 'look two entire new cities, a one kilometre tower', and the rest of the world either thought we were crazy or didn't know what was going on.
'You can't keep coming out and saying that you're launching a $90bn project because people will look at that and think you're making it up. You have to break it down and explain that it will grow to this amount over this number of years and this is the initial investment.'See also:Dubai developers feel the effects of price uncertaintyWhat does the global financial crisis mean for Dubai real estate?Nakheel denies Palm Deira stoppage rumours