Dubai real estate needs a soft landing in the global credit crunch
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Dubai real estate needs a soft landing in the global credit crunch

Dubai real estate needs a soft landing in the global credit crunch

August was a momentous month for global capital markets and it may be some time before credit is as freely available again. In short, money costs more in terms of interest to be paid and is harder to come by. Will this dampen the spirits of Dubai's exuberant property sector, or will the alleged preponderance of equity save the day?

    Some would say the writing was on the wall for the slowdown, if not demise, of the Dubai property boom when the new law on mandatory escrow accounts for developers was decreed in July. This made it compulsory for funds paid by off-plan buyers to be held in separate accounts and only released on the say-so of the Dubai Land Department.

    Therefore the global credit crunch that swept markets in August can be seen as something of a double whammy. Whatever people say about using equity only in Dubai, leverage is commonly applied to major project finance and that borrowing is now significantly more difficult to obtain, and may be impossible in some cases.

    It is no secret that the Dubai Government is the largest developer in Dubai but even it will now have to pay more for sovereign debt raised in Islamic bond issues.

    Costly money

    For developers, money is a cost to be put against the likely returns on a construction project. Ipso facto: the higher the cost of money the lower the return and the lower the likelihood of a project going ahead.

    Given the double whammy of tough new accounting rules and tighter credit for developers, it seems inevitable that the flow of new construction projects will finally slowdown in Dubai. Many observers see it as a chance to reassess projects and a rationalisation and consolidation of schemes.

    Whether this is a good or bad thing for house prices is a different issue. On the one hand, a slowdown in the supply pipeline should support the value of existing homes and push them higher in due course. But then there could be an accompanying panic among owners and developers that will dent confidence in the wider market.

    Government role

    It is to be hoped that the Dubai Government, in its roll as super-developer and guardian of the local market, acts swiftly to deal with any problems that emerge as a result of the new circumstances.

    Special mortgage deals would help to keep the market moving, although Dubai rental yields should keep investors interested at a time when other investments look sick. More important would be fast action if any developer were to get into trouble, perhaps having miscalculated and been caught out by the global credit crunch, for example.

    For the need is to ensure that the Dubai property boom has a soft landing and not a crash. High oil prices and massive liquidity in the UAE ought to ensure that Dubai real estate can be gently guided back to earth, although the odd tremor is only to be expected after such a vital period of expansion.

    See also:
    How will the global credit crunch impact on the GCC?
    Abu Dhabi property and the global credit crunch
    The A-Z of Dubai Property
    A Short History of Dubai Property
    AMEinfo Staff

    AMEinfo staff members report business news and views from across the Middle East and North Africa region, and analyse global events impacting the region today.

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