The UAE economy is riding on the back of a dramatic upturn in the property market. Economic recovery in Dubai, which nearly defaulted on its debt in 2009 after a realty bubble burst, is fast gaining momentum. The UAE economy grew 5.2% in 2013, the fastest pace since 2006, according to data from the national statistics office on Sunday.
But here is the first official warning about a property crisis. The market may be “overheating” and rental yields in the two richest emirates indicate “growing imbalances”, the UAE central bank said on Sunday.
Home prices in Dubai rose the most in the world last year, according to Knight Frank. Residential property prices rose an average 24% in Dubai and 21% in Abu Dhabi, the central bank said. Not surprisingly, the International Monetary Fund in May urged the UAE to enact stronger measures to curb real estate speculation in Dubai to prevent an “unsustainable” surge in prices.
A sense of buoyancy is also felt on the trading floor of the Dubai Financial Market. Overenthusiastic investors have pushed the emirate’s main stock index up 50% so far in 2014. But the market is now levelling off after the euphoria over the MSCI upgrade of UAE bourses to emerging market status has started melting away.
Dubai’s success last November in winning the bid to host the World Expo in 2020 is also adding to the momentum. While the six-month event will likely attract around 25mn visitors and generate revenues of as much as $35bn (or 40% of Dubai’s 2012 GDP), Citibank has cautioned against overestimating the “economic benefits of hosting the Expo.”
A big question mark over Dubai’s grandiose development projects plans has been their financing. Hosting the Expo in 2020 is estimated to add $8.1bn new projects to a $705bn pipeline spread over the next 10 years.
Now have look at Dubai’s debt standing. Total debt stands substantial at $142bn, or around 102% of its GDP, according to the IMF. Some $35bn of that amount is in government and government-guaranteed debt. The IMF estimates that about $64bn will come due between 2014 and 2017.
Just a day after the central bank warned about a looming property crisis, Dubai’s Land Department said growth in real estate demand has been due to an improving economy, not speculation. But residential property prices in Dubai are almost reaching 2008 peak levels, with the market not likely to see any major price correction in the short term, Standard & Poor’s has said.
Over-inflated Dubai real estate prices crashed by more than 50% in 2009 and 2010, triggering a corporate debt crisis which unsettled financial markets around the world. The emirate was finally bailed out by its cash-rich neighbour Abu Dhabi.
The UAE, especially Dubai, for sure, cannot afford another boom-and-bust cycle, which can derail a broad-based recovery gained through painstaking restructuring and asset sales. If the high-rise Dubai property market collapses again in a crippling crash, the debris will be strewn not just over the region, but the wider global markets.