Monday July 20 2009

A smattering of construction workers amble around the Jumeirah Lake Towers development in Dubai, but the roads are somnolent and the ubiquitous desert dust wafts around the development, undisturbed by human habitation.

JLT is a landmark mixed-use development of 87 towers along the arterial Sheikh Zayed Road, and was supposed to provide housing and offices for tens of thousands of residents and workers. But the partially-completed buildings are largely empty and serve as a potent example of the ferocity of the property meltdown.

Collier International's house price index of off-plan residential property fell 41 per cent in the first quarter of 2009, and prices are now back to the levels of mid-2007. Deutsche Bank estimates that property prices, - both commercial and residential - have halved since August last year, and could fall a further 15-20 per cent this year. A cull of jobs across the emirate is exacerbating the property crash.

Dubai's population will shrink 17 per cent in 2009, according to EFG-Hermes, a regional investment bank, and empty homes and offices are now legion.

Saud Masud, a real-estate analyst at UBS, estimates that the vacancy rate of residential property could double to more than 30 per cent by the end of 2010, and forecasts that residential property prices could in total fall 70 per cent from their peak.

Is any support for prices in sight? After the dizzying drop in house prices in the first quarter, Ian Albert, Colliers' regional head, says he expects the consultancy's house price index to soon show signs of stabilisation.

The outlook has improved in part thanks to a cheap $10bn loan from the federal Abu Dhabi-based central bank - part of a $20bn bond programme launched this year.

"You can actually see quite a few projects being completed, thanks to the injection of government bond funds going into Dubai, and liquidity starting to filter down into the contractors," says Chet Riley, a real estate analyst at Nomura. "So it's not the dust storm that some people think."

However, while the worst may be behind Dubai's property market, it is still facing a fraught couple of years, analysts say.

Developers are still trying to finish projects and analysts also fear that many expatriates may not return after the summer.

"The summer period, and how we emerge from it, will be critical," says Nicholas Maclean, regional managing director at CB Richard Ellis, the property and real estate services adviser.

Mr Riley estimates that the combination of new units and a "summer exodus" of expatriates will flood the market with 40,000-50,000 residential units.

The outlook for commercial property is even worse. While certain areas of prime commercial real estate are stabilising, overall the demand for offices will remain weak for the foreseeable future, says Mr Albert.

Dubai has attempted to entice investors by extending the duration of visit visas for people who own property in the emirate to six months, and new laws aimed at stimulating the market are expected this summer. However, the property downturn has thrown up some legal issues that threaten to tarnish the longer-term reputation of Dubai's real estate sector.

Graft scandals started to emerge last year, but the sector has also been tainted by disputes between investors, developers and contractors. These range from disgruntled retail investors in planned developments that are unlikely to materialise, to contractors complaining of missing payments.

The Dubai Chamber of Commerce admitted in May that its arbitration centre handled 80 dispute cases and received 322 requests for business mediation in the first four months of the year. In 2008 it handled 28 dispute cases, and 182 mediations.

Major state-linked developers are reportedly offering just 65 per cent of money owed, and no payment until 2010. One expert estimates the total unpaid bills of Dubai's state-backed developers at about $12bn.

Analysts say that professional investors are starting to scout select segments of Dubai property for potential investments.

But many longer-term international investors also have currency risks to contend with, as the UAE dirham is pegged to the dollar - which is expected to be affected by the US quantitative easing policy.

"In order for liquidity to come back into the market you need cash and confidence," says Mr Riley. "And at the moment we're lacking in both."

Source: Financial Times