Investment banker EFG Hermes has just published a 45-page analysis of the Dubai real estate market with a new assessment of supply and demand. Dubai has a demand for 40,000-50,000 residential units per year, says this study and 69,000 units are to be delivered in 2007. But 2008 is the real problem.
In 2008 some 139,000 units are due to be handed over. However, delivery dates in 2008 are even more likely to slip than in 2007. For in 2008 only 14 per cent of these units will be completed by large developers, compared with 75 per cent in 2007.
All the same this study highlights a fear prevalent in the local market that while the outlook for 2007 is sound enough, it looks as though supply and demand will be getting seriously out of kilter by 2008. Thus in 2008 EFG Hermes predicts that rents and prices will begin falling.
The exact extent of price falls in 2008 will depend on how much of this additional supply actually hits the market, note the authors. But they see an oversupply of units starting in 2008 when the bulk of current construction is due for delivery with the number of residential units doubling to 530,000 by 2010.
2007 a stable year
For 2007 this investment bank suggests that apartments are overpriced but that villas have not yet peaked in price. It points to the building of 10 apartments for every villa while the demand for villas remains high among families.
Without any historical precedent to guide to property cycles in Dubai, EFG Hermes turns to the last cycle in Singapore for a pointer to the future pattern. Singapore went through a boom in 1998-2000 with prices up 37 per cent and then a short period of stability before a sharp drop of 30 per cent.
This matches with EFG Hermes' main scenario for Dubai with a period of stability in 2007 followed by a cumulative 25-30 per cent fall in property values by 2010, albeit 'the range of potential price decline outcomes is very wide'.
EFG Hermes says that demand is the most difficult part of the supply and demand equation to work out. In short: whether or not Dubai can really absorb this huge supply of property over the next four years.
The major caveat is that this analysis is predicated on there not being any significant slowdown in the economy which would weaken the flow of expatriates into Dubai. So if oil prices came unstuck in the forecast period the outlook would be very different.
On the other hand, instability in many regional countries and a continued high oil price would have the reverse effect, bringing more people, more money and higher housing demand.
For while it may look as though Dubai is building far too much real estate, the supply could still be too slow to keep up with a surge of demand under some scenarios, and who can really predict what is going to happen in the Middle East over the next four years? Analysts do not have an easy task.