It is still too early to say whether Dubai’s real estate market has crashed, but all the indicators are that, at the very least, it is in the middle of a serious correction.

The events of the past three months have been nothing short of spectacular.

As recently as July, the enormous stockpile of planned and ongoing projects meant that Dubai’s booming economy seemed to be impervious to the effects of the global credit crunch.

The emirate and its ‘build and they will come’ mantra was being touted as a haven from the global economic storm.

How wrong that assessment was. Although the Central Bank of the UAE quickly sought to reassure investors by claiming that local financial institutions had virtually no exposure to Lehman Brothers, the US bank that collapsed in September, subsequent evidence has proved otherwise.

UAE-based investment bank Shuaa Capital reported a $21m write-down from exposure to Lehman Brothers, and other banks in the region have made similar losses.

This comes on top of earlier, even larger write-downs due to investments in financial products such as collateralised debt obligations that lay behind the collapse of the US mortgage market.

Lehman’s failure has forced banks worldwide to reassess their lending strategies, and the bad news for Dubai is that banks no longer want exposure to the real estate market.

“Our bank is overweight with real estate,” says one UK-based banker. “So we are not interested in financing real estate projects. The rest of the international banks will say the same.”

Debt access

Developers, including those at Dubai government-related firms, which are collectively known as Dubai Inc, publically maintain that they still have sufficient access to debt, but bankers privately claim otherwise.

“There is a real disconnection between what senior executives at Dubai Inc’s real estate developers think the banking sector will do for them and what the banks will actually do,” says the UK-based banker.

For developers, this means there is little finance available for new projects.

Most do not have enough equity to finance projects themselves, and while local banks may be able to fund some schemes, the majority will struggle to find the money to get their projects moving.

The impact of this shrinking pool of finance is being seen across the emirate. Some projects have already been scaled back, delayed or cancelled.

The biggest to be affected so far is Palm Deira, where local developer Nakheel has instructed contractors to stop work on elements of what is planned to be the world’s largest man-made island.

This decision, revealed in MEED on 24 October, came just weeks after the developer launched plans to build a 1.4-kilometre-high tower as part of its $38bn Nakheel Harbour & Tower scheme at the Cityscape trade show in Dubai.

The timing suggests the severity of the credit crunch either took the developer by surprise, or it is now prioritising its projects and scaling back on more marginal schemes that promise less immediate financial returns.

“There is definitely a slowdown in activity,” says Blair Hagkull, managing director for the Middle East and North Africa at UK real estate firm Jones Lang LaSalle.

“The level of project review in the early stages is intensifying, and when investors purchase land, they are now making sure they get the optimum usage out of that land.

“Some of these projects are the largest of their kind in world. It is the smart thing to do, irrespective of what happens elsewhere.”

Many other developers are taking similar decisions, although few like to admit to them in public.

Other projects rumoured to have been affected include a scheme in the Al-Barsha area of Dubai, where contractors have been told to suspend works. Projects in Dubailand, such as the giant Asia Asia hotel, have also been affected (see News, page 11).

“The projects are there, but there are a lot of delays, no one is in a hurry to do anything,” says an estimator at one Dubai-based contractor that is bidding for several real estate projects.

Making preparations

Consultants are also feeling the pinch and laying off staff as firms prepare for the inevitable slowdown.

One architectural firm working in Dubai has informed staff that: “The global financial crisis has stopped a number of the firm’s projects, suspended others and slowed down many of the ongoing projects.

“The resultant economic downturn is not expected to recover to its previous level for quite some time.”

More alarmingly, even government-backed infrastructure projects have been affected.

There is a high-level tussle between the Roads & Transport Authority (RTA) and Dubai Airports over the funding of the AED40bn ($10.9bn) Purple Line for the Dubai Metro that will connect Dubai International airport and the new Al-Maktoum International airport in Jebel Ali.

The disagreement is expected to delay the award of any construction contracts.

Dubai Electricity & Water Authority (Dewa) has also been affected. It has scrapped the tender for the first phase of its P Station power and water project at Hassyan, citing high prices.

The Dubai-based estimator says he expects more projects to be delayed as clients wait for prices to come down as the market contracts.

“The market is becoming slower, so contractors will need to look for work and clients hope that will mean cheaper prices,” he says.

“Materials are also coming down in price. Steel is now worth about $545 a tonne, when during the summer it topped $1,500. We have not seen a reduction in concrete and cement prices, but it will come as things slow down.”

Finance and costs are just one side of the development equation; demand for real estate is the other critical factor.

As economic uncertainty percolates through the economy, speculators are also moving out of real estate and many prospective buyers are adopting a wait-and-see approach.

With sellers starting to outnumber buyers, anecdotal reports suggest prices have already fallen by 10 per cent from their peak value.

Real estate agents report that October has been a disaster as properties failed to meet their asking prices.

“The touted increase in pricing over the past year is coming off,” says Hagkull. “There is a difference between what people ask for and what they get.”

To make matters worse, many developments are close to being completed, raising the risk of the market being in a position of having too much supply.

Over the past year, more than 40 completed tower blocks have been handed over to their new owners and tenants at Jumeirah Beach Residence, together with numerous other towers at Dubai Marina and Jumeirah Lake Towers.

More are on the way as towers at Business Bay and other developments around the emirate are completed. As these units come onto the market, basic economics suggests they will drive down prices even further.

It now seems that after years of strong growth, the same factors that converged to create Dubai’s booming real estate-driven economy are conspiring against it.

Instead of latent demand, the market is heading towards a position of oversupply.

Cheap financing has disappeared and the dollar is strengthening, making Dubai more expensive in comparison with major cities elsewhere around the world.

Opportunities elsewhere

Falling property prices in more mature markets such as London and Paris mean there are more attractive real estate investment opportunities away from Dubai, where the market has reached a peak.

“One of the things that drew people to Dubai in the first place was that prices were attractive when compared with other markets,” says Hagkull. “Now those prices are retreating.”

Perhaps the most worrying change for the long term is that oil prices have fallen by more than 50 per cent since July and are close to $65 a barrel, compared with a peak of more than $147 a barrel in July.

If this collapse in prices is sustained, it will have a serious impact on Dubai’s project market.

The emirate itself may have diversified the vast majority of its economy away from the hydrocarbons sector, but it is still heavily dependant on investors from elsewhere in the region that do rely on energy exports for their revenues.

If prices remain at the $65-a-barrel level, the excess liquidity the region has enjoyed for the past five years will be far more limited.

Abu Dhabi emirate, for example, based its budget this year on an estimated oil price of $45-50 a barrel.

Given the recent drop in oil prices, Abu Dhabi has far less room for manoeuvre than
it did before and, with a massive bank of projects of its own, will be less tempted to seek investment opportunities in Dubai than it has in the past.

The same applies to Saudi Arabian and Kuwaiti investors who, together with investors from Abu Dhabi, have provided the bulk of foreign investment in Dubai’s real estate market over the past five years.

It may be too early to claim that the market is crashing, but more projects are expected to slow down, and more jobs cuts are expected to be made in the coming weeks.

A clearer picture will emerge towards the end of the year, when the industry releases figures for how real estate sales performed in the third quarter.

If they show a significant fall, as anecdotal evidence suggests they will, it will be fair to assume that the long-awaited crash has arrived and Dubai will be in for a rough ride in 2009.