On the brink

When the CEOs of two of Dubai’s largest real estate companies resigned within a week of each other in June, plenty of United Arab Emirates (UAE) watchers suggested it was the final straw for the emirate’s fledgling real estate market.

The exit of Simon Azzam, CEO of Union Properties, and then Nasser Al Sheikh, chairman of Deyaar Developments and not long ago head of Dubai’s Finance Department, had tainted the city’s fairytale rise from merchant seaport to international business behemoth.

In just three decades Dubai had seemingly shown the world what was possible when ambition was given free reign. A city of superlatives, its buildings remain the biggest, the tallest and the most luxurious in the world while its leaders have been credited as the most forward-thinking in UAE for diversifying Dubai’s economy into tourism, finance and real estate, instead of relying entirely on oil wealth.

Then of course, there are Dubai’s residents – the lawyers, bankers and public relations tsars who prop up seven-star hotel bars with some of the highest salaries in the world.

Or, at least, they used to.

In 2009 it looks for many like the Dubai party is over. Stories abound of expats abandoning the emirate en masse, leaving shiny sports cars in the airport car park and bills unpaid. Meanwhile, the drills have fallen silent on the sites of some of the most ambitious property projects.

A real estate market that was valued at US$750billion earlier this year has been rocked with resignations, job losses, development failures and an exodus of buyers – in the form of expats – back to their home countries. House prices are down by as much as 50% and Swiss bank UBS predicts they will fall another 20%, leaving Dubai real estate the worst hit in the world.

Add to this the fact that government debt has risen to US$80 billion, leading Dubai’s rulers to seek a bailout of US$20 billion from their wealthy neighbor Abu Dhabi, underwritten by the UAE’s central bank.

The fall from grace of the world’s most high-tech desert metropolis has divided opinions amongst its residents, with half arguing that the real estate crash is only short term, and the other half claiming that the worst is still to come.

Colin Foreman, a UAE-based business journalist, says investors in Dubai are still trying to pull out of sales agreements and developers are struggling with cash flow. On top of this, expats – the lifeblood of the emirate – are leaving in droves.

"When expatriates leave Dubai it has a dramatic impact on the economy as 100 per cent of those individuals’ personal consumption leaves," Foreman said.

Many are staying positive, however. One theory goes that the crash could lead to more investment in Dubai property as international investors step in to snap up distressed assets.

Georges Makhoul, who heads the Middle Eastern and north African operations of investment bank Morgan Stanley, noted recently that the purchase of these assets would unlock capital that could be deployed on infrastructure projects and help banks boost lending. But Makhoul admitted it would not be until the end of 2009 that this might happen.

Matthew Green, associate director of CB Richard Ellis (CBRE) in Shanghai, agrees that there are opportunities for shrewd investors. He said that as prices bottom out for both ready and off-plan properties, a whole new range of products will come onto the market.

"Interest from real investors is on the rise, but they are generally choosing to play wait and watch strategies, waiting for the prices to bottom out before entering the market," Green explained.

He quickly added that investors would most likely opt for properties that are ready to occupy now – or will be in the next 12 months – rather than trust the billion dollar off-spec buildings planned throughout the emirate.

Indeed, many believe that the proliferation of ambitious building projects that were sold even before the ground was broken are to blame for the present situation.

CBRE’s Pamela Tam, a Dubai resident for the last three years, feels that the crash in the market has been somewhat of a blessing in disguise. She explains that in recent years the speculative nature of investments in the emirate had spun out of control, with kilometer-high towers sold years before completion. The recent crash could bring developers down to earth.

"It will weed out the speculative developers and bring in the right sort of investors who want to contribute something long-term to Dubai. It’s a good thing that has happened," Tam said.

She is convinced that Dubai will remain a great place for companies to relocate to, despite the recent upset. It is a relatively easy Middle East posting, with excellent transport links to the rest of the world and a high standard of living. When the foreigners return, the value of real estate will increase once more, Tam said.

If and when investors do re-enter the market, it is a fair bet that many of them will be from China. A recent study by real estate website and news service REIDIN found that Chinese investors channeled over US$36m into Dubai in the first three quarters of 2008, making China the fifth largest investor in the emirate.

But REIDIN Asia managing director Charlie Nixon points out that since the beginning of 2009 Chinese investment has declined. At the same time, he said, other investors are putting on braver faces – investment from the UK and India has actually increased this year.

"Though Chinese investment seems to have dropped off for the time being – perhaps due to new opportunities in the UK and US markets – foreign investors have not completely lost hope in Dubai,’ Nixon said.

And, Nixon points out, investors would be foolish to do so. Dubai remains one of the best areas to invest in due to the size and dynamism of the market – demand will also remain strong.

"Around 2 billion people live within a four-hour flight radius of Dubai," he said.

That is certainly the feeling of those involved with Cityscape, the annual business-to-business real estate event that will be held in Dubai in October. Now in its eighth year, Cityscape is one of the biggest real estate shows in the world, attracting hordes of investors, developers, realtors and related businesses.

Rohan Marwaha, managing director of Cityscape, notes that despite the slowdown in the market, there remains a substantial growth pattern across the region, setting UAE apart from the rest of the world. Indeed, the next 12 months could sort out the men from the boys in the real estate world.

"Companies that carefully plan in the down market will recover fastest and further post-recession," he said.

So much for the hype. Those on the ground who are not involved in developing or selling real estate remain open-minded, if a little more pessimistic.

But UAE-based journalist Foreman, like CBRE’s Tam, feels that Dubai can learn from its mistakes and emerge from the current crisis stronger and more responsible.

"With hindsight Dubai launched too many projects, many of which were based on off-plan sales, and that market has now collapsed," Foreman said. "The emirate is now busy consolidating its various real estate businesses and associated projects. This means that it will be able to focus on projects that work in the future."