Dubai realty gets speculation jitters

Dubai: Speculating about whether Dubai's real estate bubble will burst has been a hobby of Gulf watchers for years. Doom-laden predictions have so far failed to materialise, as one mega project follows another.

With property prices up about 40 per cent this year - and a soaring 79 per cent in the past 18 months according to Morgan Stanley - questions about the sector are surfacing again.

Standard Chartered has issued a report warning that excessive speculation is creating the risk of overheating. And Fitch, the ratings agency, has said that "many challenges have begun to surface", as a result of oversupply.

Morgan Stanley has forecast a probable 10 per cent fall in realty prices by 2010.

In the worst-case scenario, the US bank said, Dubai's real estate market could follow Singapore's trend in the 1990s, when prices plummeted 80 per cent in 18 months.

Morgan Stanley's predictions were based on the assessment that oversupply would surface from the second half of next year.

Others disagree. HSBC believes that, with sustained population growth of about seven per cent and construction delays slowing delivery to the market, demand will continue to outpace supply until 2011.

"If you read the brokers' reports in 2006, most say that there was an oversupply coming to the market in Dubai. Then they pushed it forward to 2007, now to 2008," said Majid Azzam, analyst at HSBC. "We don't see a danger any time soon."

Azzam describes the markets as "very tight", with occupancy levels high and "a huge shortage" still. "The population is growing very fast and developers are not delivering on time."

Real estate and construction accounted for about 30 per cent of Dubai's gross domestic product last year, according to HSBC.

Intervention

Sean Gardiner, head of research at Morgan Stanley, acknowledges that the potential for government intervention in the market is a risk to his forecasts.

"It's very difficult from both supply and demand because access to quality data tracking these two drivers is limited," he says.

"How many [people] work as unskilled labour on construction sites? How many work in the service industry, where housing and food is included in their monthly pay?"

Some new arrivals in Dubai can afford property, but the numbers are not available, Gardiner says. "Visibility is very low."

The bear case comparison between Dubai and Singapore is not probable, he says, because the emirate is unlikely to suffer a broader economic crisis.

Negative real interest rates and Dubai's equity market fall has made real estate a favourite with investors. The sector is sponging off much of the liquidity in the market.

Off-plan properties are particularly attractive because investors put in as little as five per cent in down-payment.

Emaar and Nakheel have announced restrictions on off-plan sales in a bid to tackle speculative buying.

But Marios Maratheftis, head of research at Standard Chartered, says more could be done, even though he believes the fundamentals are positive.

He worries that much of the speculative investment may be financed with consumer loans rather than mortgages, which could create debt problems in the future.

"If this excessive behaviour continues, there is a risk of a correction in the future," Maratheftis says.