The Dubai Miracle : Game Over Or Just The Beginning ?
In recent years, well almost a decade now, leading economists and financial analysts from all over the world have been amazed by what has been termed by many as The Dubai Miracle which tells a story of a city’s explosive and phenomenal growth and expansion, real estate projects on a scale that would be large even by US or Chinese standards and announcements of further growth and developmentsthat make even the most gung-ho developers dizzy.
Recently many of us thought we had it wrong when reading about the latest plans in Dubai to have one of its prime beaches cooled down artificially for the benefit of the guests at the hotel (read the full story on this here) but then again we are talking about Dubai - a place where everything seems to be possible.
Lately, however, Dubai has started to feel the effects of the major world financial crisis, despite strong government and semi-government statements from as recent as November (click here to read Mr Mohammad Al Abbar’s statement from November) refusing to agree that Dubai would be sucked into this global financial turmoil.
There are now clear signs that Dubai is beginning to suffer too, not least in its major real estate sector where most of the major projects are focused but also its tourism sector, and there are now many voices of concern and unhappiness emerging from consumers and investors alike not to mention the financial institutions who are heavily exposed in this massive project called Dubai.
This blog looks into some of the signs and concerns that are now facing Dubai and asks the questions whether the Dubai Miracle is coming to an end or if in fact they will somehow come through this crisis stronger and better than before.
The Wall Street Journal tells a story about Dubai lenders beginning to feel the squeeze as mortgage defaults by overstretched borrowers is now becoming common:
Borrowers are being squeezed by higher interest rates and job cuts by major employers hurt by the global financial crisis. Property developers also were affected Sunday as tumbling oil prices hurt sentiment, leading the region’s stock markets lower.
As borrowers run into trouble, officials at HSBC Holdings PLC, the largest international bank by assets offering mortgages in Dubai, told Zawya Dow Jones that the lender has been contacted by a growing number of customers in the emirate struggling to pay their home finance.
At Emirates NBD, the Gulf’s largest lender by assets, an official said the bank has witnessed “significant defaults from the speculative community.” However, the official wouldn’t disclose if the bank itself has been experiencing defaults.
The same article from WSJ goes on to point out that even though banks and lenders have the right to re-possess properties from clients if they default, there is no precedence for foreclosures in Dubai which could lead to additional worries and problems for the financial institutions who are heavily exposed in the property market:
Although new mortgage laws say banks are entitled to repossess a property if a borrower defaults on a mortgage for more than 60 days, experts said foreclosure may be a lot more difficult in practice.
“There is a mechanism in place for foreclosures, but it’s never been tested before,” said Charcol’s Mr. Dommett. “In practice, the process could take a very long time, and banks could be left with property on their books that they’re unable to sell.”
Local Dubai-based newspaper, Gulf News, tells a story on how several companies are now struggling for finance and credit and how they are trying to raise cash from investors:
Dubai-based property developer Union Properties said Monday that it wanted to issue up to Dh2.5 billion of convertible bonds, as securing project financing from banks had become difficult during the financial crisis. Convertible bonds allow investors who have lent money to companies to change the debt into shares in the business.
Also, Shuaa Capital, a leading regional investment bank said on Monday it would seek shareholder approval next month to extend the maturity of its convertible bonds.
“The signal is that they need cash. Banks will not give you cash now or they will do it with too many conditions. Selling bonds is a tool to get money and the strategic investor is entitled to an interest dividend of 6 or 7 per cent,” said Hamood Abdullah Al Yasi, general manager at Emirates International Securities on Monday.
Meanwhile, and perhaps rather surprisingly amidst the majority of observers being quite possimistic about Dubai’s economic outlook, Swiss banking giant Credit Suisse has reiterated a positive outlook for Dubai’s troubled real estate sector as business daily Emirates Buisness 24/7 reports:
Swiss bank Credit Suisse has reiterated a positive outlook for the UAE property sector, as it believes that real estate market will recover quickly from the current turmoil due to the country’s solid macroeconomic fundamentals.
“As a result of a slowdown in economic growth and liquidity challenges in the GCC region, we downgrade our target prices for most real estate stocks in the UAE. However, we stay overweight on the sector as we believe the UAE real estate market will recover quickly from the current turmoil thanks to its solid macroeconomic fundamentals,” the bank said in a report titled “Emea Real Estate Outlook 2009.”
The article goes on to quote Credit Suisse for predicting that both the Dubai and Abu Dhabi governments will have the biggest effect on the future of the real estate sector:
The bank believes that there are three potential catalysts that should be monitored in the short term: Oil prices, which have a strong effect on the UAE’s liquidity and hence the real estate market. Any sign of upside in oil prices would be viewed as positive news; bringing the real estate sector under the umbrella of the federal government, which is dominated by Abu Dhabi, thus ensuring the availability of liquidity; and positive news about the condition of the real estate market in Dubai.
“We believe that the market is discounting most of the negative newsflow about the lack of funding, shortage of mortgage availability and the fact that Dubai is a highly leveraged market in a global credit crisis. In our view, it even assigns a zero value for some projects in the pipeline for some UAE developers. We expect that developers will cut supply as demand deteriorates as a result of negative sentiment and the shortage of liquidity, which will in turn affect their forward NAV as they sell fewer units than expected.”
The article goes on to quote Credit Suisse for saying that the governments must control and also cut the supply of real estate projects in order to avoid a collapse and get back on track:
Credit Suisse believe that cutting supply to keep a sustainable level of demand will not be enough without an effective solution for financing problems in the UAE, especially on the demand side.
“We think that the UAE federal government (through sovereign funds) will have to play an active role in providing financing for both home buyers and developers, as the financing situation, especially in Dubai, is currently under pressure.”
The old question of whether Abu Dhabi, which is where the Federal Government sits and also where 90%+ of all UAE’s oil revenue stems from, is truly committed to financing and underwrite Dubai’s massive real estate expansion, is also highlighted by Credit Suisse as a key factor to the recovery:
“We are confident that the Abu Dhabi government is still committed to financing development projects in the emirate and will provide the required support for those projects. However, we think the most important question is, will the federal government, which is dominated by Abu Dhabi, provide financial assistance to the real estate market in Dubai?
“We believe it is in the interests of the UAE that the Dubai market remains sustainable and think the federal government may step in to make sure that the real estate market in Dubai doesn’t go into a deep slump because of the current shortage in liquidity. However, it is difficult to determine the form of this involvement. We also believe that there is likely to be some sort of consolidation among developers in both emirates, thus bringing the sector under the umbrella of the federal government in the future,” Credit Suisse said.
What the next chapters in the Story of Dubai have to reveal only time will tell but it goes without saying that Dubai’s growth and expansion till date as spearheaded by its visionary ruler Sheikh Mohammed Bin Rashid Al Maktoum has been a truly amazing story to follow and whilst many analysts and economists now remain cautious if not pessimistic about Dubai’s future and ability to come through this current and deepening crisis unscathed, this author would not put it past Dubai to come out on top - once again.
This blog will continue to follow the ups and downs of Dubai to see where it all ends - or as it may be begins again.
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