In the laws of gravity what goes up most will fall furthest, and that certainly proved true of the Dubai real estate market in 2009, a year that most participants would like to forget and some still refuse to acknowledge has actually happened.
By the middle of 2009 studies by leading estate agents placed Dubai at the very bottom of a global league table of property markets with prices down around 50 per cent on a year earlier. Of course, the background is a market where prices had quadrupled in five years until this year of reckoning.
The scenes in Dubai in 2009 have been reminiscent of the Asian Financial Crisis of a decade earlier with abandoned building sites on every corner and vacant patch of desert. It is a sight to bring tears to the eyes of developers, bankers and property owners.
Abandoned construction sites
Usually in property crashes there is one unfinished development that symbolizes all that went wrong. Dubai has a number of candidates: the second and third Palm islands; the map of the world in islands offshore; the abandoned skyscrapers of the Dubai International Financial Centre and the Business Bay; or the extremely quiet City of Arabia where dinosaurs were again supposed to walk the earth.
However, surely the shining symbol of Dubai’s excess is the Burj Dubai, the world’s tallest building, which is still set to open on January 4th. You can not get much more symbolic that an 800-metre tower with 1,044 apartments, 160 hotel rooms and even 3,000 car parking spaces.
Through-out modern history constructing the world’s tallest building has often been a signal that a property market is at the top and about to crash, as my book ‘Opportunity Dubai’ noted in 2008 (still on sale from the link above). Fortunately for Dubai the Burj Dubai is the work of stock market listed Emaar Properties, the most financially sound of local developers whose first-mover advantage in the market was played to great advantage.
Limitless debt
It is the state-owned Dubai World property developers Nakheel and Limitless that brought us the Dubai debt crisis of December, a crisis that ended as suddenly as it began with Abu Dhabi agreeing a new bond issue for Dubai at the eleventh hour. But how else could the world’s worst realty crash have ended?
Property booms are always fueled by easy credit and debt. At first there is a real dislocation – like the Dubai decision to sell real estate to foreigners for the first time in 2002. Then there is a genuine surge of interest in the new opportunity.
But this soon gets out of hand as people buy with higher and higher expectations. And remarkably those expectations are at first realized, because the flow of funds from the same buyers drives up prices. No shortage of schemes to take this money emerge.
2008 crash
Eventually the music stops and the credit dries up, and the market crashes. This is what happened in September 2008 with the global financial crisis which suddenly removed the foreign credit lines that had become essential for the majority of the Dubai projects.
It is probably true that too much construction was approved for too shorter timeframe. That forced up construction prices and fueled the boom to even more unsustainable levels. But the global financial crisis was the pin that burst the bubble.
For 2010 the prospect is a rescheduling of some loans, and the new bankruptcy laws leave open the possible liquidation of projects where the situation is not redeemable. Will the property market deteriorate further before it gets better? That might well prove true but prices have already fallen so far that they simply could not fall by the same amount again.
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