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House arrest, Part I

House arrest, Part I

The UAE’s real estate industry is in shock, but the country’s mortgage providers will feel even greater pain from an expected wave of property defaulters, Part I

January 28, 2009 12:54 by

The lull in Dubai’s real estate industry has been telling indeed. Years of speculative buying and selling has given way to shelved projects, lost investments, delivery uncertainties, repackaged finances and most importantly, hundreds of redundancies. As the industry ponders its future, questions are being asked on what went wrong and, for a change, where to go from here. More and more players admit the good times are over for now, as buyers and sellers struggle to find reasonable price points. But all is not lost and lessons are being learned. Policy responses are more and more geared towards long-term viability instead of near-term price support.

However, most insiders agree that a reversal of fortunes is some way off. At best, some investors will get to know the bottom value of their assets. Declining prices should continue over the early part of 2009, and moves towards consolidation in the real estate and banking sectors are expected. Lending conditions are also making it difficult for consumers to take advantage of easing prices. Anxious developers are coming up with innovative solutions to navigate the crisis and investors who have bought up more units than they can digest are pooling resources to secure at least some units.

The speed of recovery, insiders say, will depend on three factors: liquidity, customer confidence and supply management. The EFG Hermes 2008 UAE research book says the weakness in real estate has created a significant overhang in the market. “Prices will decline 15-20 percent over 2009, though we fear the high level of speculation could lead to a stronger and more front-ended decline,” it says. There are concerns about the direct impact on listed financials and real estate companies, as well as from the indirect impact through bankruptcies and unemployment. The contagion of global recession and stock market crash may further compound the problem even though, interestingly, not everyone blames these alone for the present unsavory conditions.

Fixing faults

Analysts say the global financial crisis was only a catalyst, which gave life to a pre-existing problem. “It was an off-balance sheet type of leverage in terms of the way these projects were marketed in the region with payment plans, very little upfront money, and then people were able to flip,” says Robert McKinnon, managing director of research at Al-Mal Capital. If it were not for the credit crisis, he says, there would have been a multitude of crises. “Eventually it would have come to an end when people had to buy to live in [Dubai], and prices would have been out of sync with affordability. The credit crisis just brought forward the affordability issue before completion,” he says.

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