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Sheikh draws the line

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Dubai flouting biggest property taboo of an economy without brakes

The desert gave Dubai an easy excuse to keep building. Sprawling for kilometres in every direction from the skyscrapers on the coast, villa communities have sprung up across the sandy interior, bringing with them schools, hospitals and shopping malls. Where the dunes once spilled into the Persian Gulf, an eight-lane highway connects new developments with established neighbourhoods.

But now the emirate’s leadership is drawing the line.

Work on a mega-airport was put on hold. And Dubai’s ruler has created a committee, headed by his son, to balance supply and demand in the property market and ensure state-owned developers don’t crowd out private builders.

Some developers are already holding off on planned projects. Two of Dubai’s home-grown billionaires are calling for a pause to development. Khalaf al Habtoor, who once added 1600 hotel rooms to the city through one project, said the market is saturated.

“If this oversupply continues it will be a disaster,” says Hussain Sajwani, chairman of Damac Properties. “The banking system will be affected and that’s something we can’t afford.”

Much of the property glut is of the government’s own making, since it controls some of the emirate’s biggest developers. The state-linked firms, created to speed up construction, used cheap and often free land to compete for buyers. And optimistic projections of growth in Dubai’s population, which consists largely of foreigners, only fed the building boom.

“The developers would benefit from cutting back on the supply because that would raise the prices in the long term,” says Craig Plumb, head of Middle East research at broker JLL. “So far, they’ve chosen short-term interest by maintaining the cash flows even at the cost of lower prices.”

Oversupply means property prices are down around 30% over the past five years. In 2018, Dubai’s economy had its weakest expansion in almost a decade.

With banks threatened by falling home prices and non-performing loans, Fitch Ratings estimates a “significant portion” of $23billion (R346bn) in loans made to Dubai government-related companies maturing at the end of next year might need to be restructured.

Late last year, the United Arab Emirates’ central bank proposed measures to keep lenders from what it called excessive exposure to real estate.

For now, Dubai is counting on this year’s World Expo to boost its economy. But it’s less clear how the newly built infrastructure will be used after the six-month showcase is over.

More than 30000 homes were completed last year alone, about double the annual demand, says JLL. Meanwhile, retail and tourism – vital to Dubai’s economy – have struggles of their own.

“Real estate projects need to control their pace to bring added value to the national economy, to avoid becoming a burden and a source of imbalance in our economic journey,” says Dubai’s ruler, Sheikh Mohammed bin Rashid al Maktoum.

But is going into reverse the right remedy? Land sales are an important source of state revenue. And authorities also risk wrong-footing firms unaccustomed to interference.

“A limit can be set through tougher rules on development as a pre-condition to issuing permits but direct interference sends the wrong message to investors,” says Ali Taqi, head of equities at Rasmala Investment Bank in Dubai.

The tough truth is that a solution might be to look beyond real estate to fix what ails Dubai’s economy. The emirate might find an identity makeover preferable to years more of malaise.

Policymakers have already implemented reforms to residency laws to attract skilled workers and cut fees to reduce costs for businesses. Lower property prices could also help the competitiveness of Dubai, one of the most expensive cities for expats.

“Even if they slowed construction, you have an excess of empty apartments and buildings,” says Garbis Iradian, chief economist for the Middle East, North Africa region at the Washington-based Institute of International Finance. “They should come up with new forces of growth such as innovation, technology, improving the human capital and attracting more qualified expats to come up with light manufacturing,” he says. – Bloomberg


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