UBS: Dubai property crash only in early stages
April 25th, 2009
THE slide in Dubai’s residential property market has only just begun and any investor considering investing in in bricks and mortar there would be well-advised to steer clear for now, according to the latest research from Swiss-owned investment bank UBS.
The investment bank predicts that, from peak to trough, the emirate’s dysfunctional real estate market will slide by up to 70%. It added that Blingopolis’s residential market peaked in the final quarter of 2008, but has only fallen by 25% so far. By my calculations, that means there is a further 45% to fall.
Saud Masud, the UBS report’s author, said: “Our proprietary analysis concludes that Dubai residential property may trough at around the Dirhams 500-800 per square foot level, down 57%-70% from the peak of Dh 1,850 per square foot.”
The research report stated that Dubai’s real estate fundamentals weakened considerably from Q4 2008 to Q1 2009. It blamed this on a lack of net new demand (due in part to the tightening of the credit markets), investor defaults, an surge in project cancellations to 70%, payroll cutbacks and a build-up of inventory.
UBS estimates that house price valuations have fallen some 25% from the peak. A similar report on Dubai’s property market issued last week by UAE-based Asteco said apartment prices had plunged by 39% in Q1 2009, with villa prices down some 43%.
Masud said that potential investors should sit on the sidelines and consider taking the plunge in the second half of the year. The report acknowledged that the softening of the rentals market – caused in part by the recent massed exodus of white collar workers from Dubai, which is caused hundreds of unpaid for cars to be abandoned at its airport – will be further deterring investors.
Masud added: “As we move past the summer season and the potential for expat exits picks up, there is the likelihood that rents will begin to drop faster than home prices, thereby compressing rental yields to mid-single digits or below.” He believes the weakness of the rental market will be a disincentive to buyers who intended to use rental payments to cover their installment payments.
The report also downgraded Emaar, a property developer owned by the Investment Corporation of Dubai, and another developer named Union Properties to ‘sell’ from ‘neutral’, while the Abu Dhabi-based developer Aldar was downgraded to ‘neutral’ from ‘buy’.
Some commentators believes that UBS is being optimistic. Website International Property Investment believes there is now a case for believing the damaged emirate’s property market may never recover. On April 23rd, IPI said: “There is a good argument [the luxury end of Dubai's market] may never recover, given the underlying fundamental issues – pollution, falling expatriate populations, lack of laws to protect small investors and an almost total lack of transparency. Top this off with the liquidity crisis in the financial system, and you have a recipe for disaster.”
Separately, it has emerged that Dubai World’s Nakheel subsidiary -– which is responsible for the transient archipelago of artificial islands off Dubai’s coast — is in deep financial trouble. It needs to find $3.52 billion in order to refinance a bond by December and another worth Dhirams 3.6 billion ($980m) in May 2010. In the current financial climate, this is likely to prove punitively expensive and might even be impossible.
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