Real estate: Dubai returns to exuberance
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Opinion

Real estate: Dubai returns to exuberance

Intensified property speculation in Dubai is one of the more worrying signs of excessive risk-taking in emerging markets.

Dubai is back to its old tricks. More proof came in October, when a local firm unveiled plans for a replica of the Taj Mahal, five times bigger than the original, and housing a 300-room hotel.

Research from Citi says that over the past year the emirate has launched or relaunched developments worth at least $11 billion. These include a new reclaimed island, lagoons, lakes and more canals, the UAE’s biggest hotel complex, and a new, 1,100-seat theatre.

Property transactions are not yet at pre-2008 levels, but are heading that way. According to CBRE, Dubai property has seen some of the most dramatic price rises in the world this year. Prices of mid-range apartments and villas are up around 20%.

In the short term, this is great news for indebted state-linked conglomerates, which are heavily exposed to the local real estate market. Nakheel, a state-linked developer that the government had to take over directly after 2009, said last month that it had recently completed land sales worth the equivalent of $114 million.

As Citi points out, Dubai-related risk assets have rallied strongly in recent months. Yet banks and bondholders are still facing what Credit Suisse estimated in early 2011 would be around $35 billion of Dubai-related debt maturing in 2013 and 2014.

It was only three years ago that this market crashed spectacularly. Projects were cancelled or put on hold and key state-linked conglomerates were subsequently forced to beg banks to reschedule debt.

Since 2009 Dubai’s recovery has been as impressive, if not as spectacular, as its initial boom and crash. Its status as a re-export hub between Asia, Africa and Europe has brought benefits from continued growth and increasing trade among emerging markets. Dubai airport is now the second busiest in the world.

As petrodollars flow into the region, Dubai is a safe haven for commerce, investment and tourism in a wider Middle East ever more blighted by political instability. Hotel occupancy is back up to more than 80% and even the biggest shopping malls are expanding.

Property prices are recovering after the crash, benefiting from the booming local economy, as well as the post-2008 slowdown in property supply. But prices might soon reach unsustainable levels, and as more projects are announced, more supply will come onto the market.

Now developers are even returning to pre-2008 methods of selling properties off-plan, before even starting building. This is particularly conducive to pure speculation as buyers at the planning stage sell on, sometimes within a matter of days.

Overall, the convergence of interests in Dubai around an all-out return to the bubble is probably stronger than any technocratic urge for a more measured recovery. Dubai’s model of economic governance has not changed much since 2008.

Dubai might be a regional political safe haven, but it isn’t an economic one in global terms. A return to risk-on mode in its real estate market will make Dubai even more vulnerable to a sudden downturn in China, US fiscal troubles – or a deeper crisis in Iran.

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