Tuesday, December 01, 2009

Dubai World announcement to hinder property recovery in the emirate

With the state asking for a standstill on Dubai World's development and its struggling real estate unit Nakheel, the Dubai's already fragile real estate sector is likely to suffer another collapse in prices.

Marina Akopian, Partner, HEXAM Capital, said "Should they effectively default, it can become one of the biggest sovereign defaults, after the Argentinean crisis."

There is no-doubt that it will bear a negative impact on Dubai property market and global property markets on the whole, Akopian said.

The decision by Dubai to seek a six-month reprieve on Dubai World debts which has liabilities of nearly $60bn, spooked markets in Europe and Asia, amidst concern that major international banks are heavily exposed.

However, the restructuring of Dubai World and its subsidiaries could undermine confidence in the nascent property recovery in the emirate.

The real estate prices in the emirate have already fallen by 50 percent since its peak. But, the prices had shown signs of modest recovery in the recent months.

Leading property consultancy, Colliers International, had reported it's first-ever increase in residential prices ever-since the market plummeted last year.

Prices for residential properties that were kept open for foreign investments saw an increase of 7 percent during the third quarter, the report said.

Nakheel had borrowed billions to build major projects such as the Palm Islands. The $3.5bn Islamic bond due in December was a focal point in determining if Dubai can re-pay its debts.

"The Dubai World announcement could play into investor psyche. It sends strong signals to people that Dubai is yet to recover from the crisis," said Saud Masud, Senior Real Estate Analyst at UBS. The move also seems to have affected the sentiment of foreign property buyers who helped fuel the boom.

Early this month, UBS reported that property prices in Dubai could decline by 30 percent over the next 18 months and it may take another 10 years to get back to its peak levels.

Masud agreed that although the bank is unlikely to change its estimate for the drop in prices, further fall could happen sooner than anticipated. This kind of crisis brings fundamental weaknesses to the surface faster, and this could leave its impact in the sector within next six months or so.

According to UBS, one of the major concerns for Dubai real estate is the "funding gap" to complete properties that already began and on which the investors are defaulting.

Bank estimates indicate that $11bn is required to complete an expected 40,000 residential units by the end of 2010. The Head of Asset Management at Dubai-based Rasmala Investments, Eric Swats said that liquidity had begun returning to the property market, but, the market will now be under pressure as the UAE-based banks will try to limit their exposure to Dubai World.

Further, the standstill is also likely to affect other major developers such as Emaar Properties, Union Properties and Deyaar, as Nakheel may not be a standalone entity in the long run, Masud said.

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