Norton Rose's head of Middle East real estate explains why the Dubai property market has gone haywire

Nick Clayson
Nick Clayson

Dubai was supposed to be a safe bet. What's gone wrong?

It is unrealistic to think that the Middle East can operate in a vacuum. The issues facing the UAE do not solely result from the global subprime exposure but also from a number of additional factors.

Such as?

The weakness of the US dollar (which is fixed against the UAE dirham) meant that the dirham was effectively underpriced. Rumours of a revaluation hit the market in the early part of 2008, resulting in a number of global financial institutions and investors buying dirhams in the hope that a revaluation would occur.

Did it?

No. This increased liquidity was utilised by the UAE banking system, which made loans to those requiring dirhams based on healthy dirham deposits. A large number of these loans were made to those investing in the local markets (particularly in real estate). As the dollar strengthened against other currencies, it became clear that a revaluation would not take place and therefore dirhams were sold by the investors and removed from the pool of money available to the banks. This withdrawal of cash meant that banks were required to review their lending.

How did people make money on Dubai real estate?

The sale of real estate off-plan allowed investors to enter the market with a small deposit with the ability to “flip” their contracts prior to making additional payments and long before completion. This “flipping” led to super returns for such investors. For example, an investor paying a 5% deposit who sold at a 10% premium on the total purchase price has in effect made a 200% profit. Often, returns such as this were made over a very short period of time.

So, what went wrong?

Since the summer, the tightening of lending criteria meant that banks were less likely to lend on projects which had not commenced construction and also were reluctant to give finance at the levels required by buyers. Often flippers would have no access to funds beyond their deposit in order to make subsequent instalment payments and would gamble on ensuring that they could dispose of their units prior to the next instalment becoming due – or at least would be able to dispose of enough units to pay the next instalment on their retained holding.

Where are things now?

This “paper” market is widely acknowledged to be at a standstill at the moment. The market now finds itself in a situation where a number of speculators have made their first instalment on a floor or plot of land and are unable to make their next payment. Developers will be reluctant to terminate in such circumstances, particularly where they cannot sell to someone else.

What about residential jobs already under construction?

The “real” market, that is where construction has commenced or the property has been completed, is suffering a short-term state of confusion although the medium-term view is that the market will bounce back – particularly in quality sectors in quality locations.

Is it a short-term blip, then?

We await the next chapter. The number of expatriates moving to Dubai from throughout the world is staggering; all of these people will need a home. Office space still remains in very short supply, with heavy demand. Rents in all sectors have continued to increase and demand remains strong. However, owner-occupiers are struggling to find lenders to accommodate them.