Efforts by Dubai authorities to reassure investors in the emirate’s real estate market appear to have paid off, after concerns were raised about the impact of a series of corruption investigations.

It has been a testing period for Dubai’s real estate sector. On 14 August news broke that two former executives of local mortgage provider Tamweel were being investigated for financial irregularities.

The following day MEED revealed that a senior manager at the emirate’s largest real estate developer Nakheel was being investigated for bribery and other financial irregularities (MEED 15:8:08).

The impact was immediately felt on the stock market. When the markets reopened after the weekend on 17 August, Tamweel’s share price fell by 4 per cent as real estate-related companies endured another tough day.

They had already lost ground in the previous week on the market after a report was released by investment bank Morgan Stanley which predicted property prices in the emirate could drop by 10 per cent by 2010.

The run of events sparked fears among local developers that, although there was still strong demand for real estate, the profitability of future projects could be adversely affected and drop to the levels found in Europe and North America.

“I think the market is still strong in terms of demand, but the level of profits developers will make will be affected,” said a developer on 17 August in the wake of the arrests.

“If we look at mature markets where developers operate on an annual rate of return of 15 to 20 per cent and compare them with the Gulf, where it runs at about 40 per cent or more, then we can deduce that some people will be affected.

“But quality developments in good locations will remain very much in demand.”

However, just as it appeared that the market was beginning to suffer a crisis of confidence, the government moved to reassure investors that the arrests were proof that Dubai did not tolerate corruption, and was prepared to act when necessary.

The message came from the very top. In a statement issued by the media office of the ruler of Dubai, Sheikh Mohammed bin Rashid al-Maktoum, the public prosecutor clearly spelt out the government’s uncompromising stance over corruption.

“There will be no tolerance shown to anybody who tries to exploit his position to make illegal profits,” he said.

The government’s move was a bold one, but Dubai’s decision to tackle the issue head-on received high-level support from the emirate’s business leaders.

Mohammed Ibrahim al-Shaibani, the director general of the ruler’s court and chief executive officer of the Investment Corporation of Dubai, and Mohammed Ali Alabbar, chairman of Emaar Properties, both issued statements reaffirming the government’s position and even suggesting that the recent arrests could send a positive message to investors.

“This statement by the public prosecutor of the government of Dubai further demonstrates the emirate’s strong resolve and unwavering commitment to upholding global standards of corporate governance and ensuring transparency across all business sectors,” said Alabbar.

The government’s swift response also seems to have taken some of the controversy out of the issue. By assuring investors that corruption will be met with the full force of the law, it appears to have restored some confidence to the market.

This was reflected in the share prices of real estate stocks which rebounded in the days following the public prosecutor’s statement. This has, in turn, led to hopes that the long-term impact on the market will be minimal, providing that the issue is not rekindled with any more high profile arrests.

Some further arrests are still a possibility. Government officials have confirmed that a wider probe into the real estate sector is being conducted, particularly in companies where the government holds more than a 25 per cent stake.

They have made clear that if more irregularities are uncovered, then more people will be investigated and dealt with to the full extent of the law.

Although this will cause more uncertainty in the emirate’s real estate sector in the short to medium term, it is not necessarily a negative issue in the long term.

Five years ago the authorities in Doha launched an investigation into the construction industry and the Municipal Affairs & Agriculture Ministry.

During the probe a number of foreign consultants were detained, together with various government officials. Although the probe caused major problems at the time, it has eliminated much of the corruption that used to be present in Doha, improving the reputation of the market.

“We have seen a similar crackdown on corruption in Qatar several years ago,” says a regional contractor.

“It was scary at the time, however we have found that the market has been a lot more transparent since then.”