UAE economy runs the risk of a realty 'bubble' |
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Investment bank UBS has warned of its concerns regarding the risks of a real estate "bubble" to the UAE economy and that it presents a greater threat to growth than inflation.
In its latest research report, the Swiss bank said after 2010 the realty environment could become more challenging, leading to a slowdown in Dubai and a shift of focus to the property market of Abu Dhabi.
"The [real estate] market in Dubai appears to be at risk of hitting trouble earlier and more severely than in Abu Dhabi. There is a chance that the impact of the initial phase of any Dubai real estate downturn on the UAE economy might be cushioned somewhat as the 'centre of gravity' shifts from Dubai to Abu Dhabi," it said.
"We were surprised that disregarding a sharp drop in oil prices most observers seemed to regard inflation as the biggest macroeconomic risk on the horizon, not a potential real estate bubble. Projects might end up in default and burden the banking sector and overall growth."
UBS expects about 150,000 residential units to be completed in Dubai over the next two years, bringing the market into balance some time in 2010.
"Thereafter, the housing market might well swing into oversupply," it said.
"The risk of oversupply currently appears most relevant for the high-end of the residential market, which is seeing much bigger supply growth than the mid-market segment. There are already indications that occupancy ratios in the high-end segment are markedly lower than in the mid-segment of the market."
This could have a wide reaching impact on the economy because construction and real estate sectors contribute heavily to GDP growth in the UAE about 26 per cent in 2007 as well as creating additional spillovers in other sectors, such as banking.
"We believe that any significant slowdown or even a crash in the real estate sector would likely reduce UAE growth substantially. In this case, we believe the burden on the balance sheets of banks, construction companies and developers, and of many investors and households, could be very substantial," said UBS. The bank believes that the current housing shortage in the country has triggered an extensive supply response, and "a large volume of residential real estate is expected to enter the property market in the next three years".
However, the bank says it is difficult to exactly predict when the market will be saturated because of construction delays.
"With the construction sector booming, many contractors are struggling to find enough workers, which is causing project hold-ups."
Capital's office space to double
UBS said a lot of supply is in the pipeline, entering the market between late 2008 and late 2009 in Dubai, and from late 2009 in Abu Dhabi."The office market in both Dubai and Abu Dhabi is also characterised by shortages, with occupancy rates around 98 per cent and even higher in the most attractive locations."
"Abu Dhabi office space is going to double over the coming years, with supply of 415,000 square metres (4.3 million sq ft) currently under way, compared to 460,000 sqm (4.7m sq ft) at the end of 2007. As a result, the demand-supply dynamics are expected to change in 2009-10, first in Dubai and then in Abu Dhabi."
Hotel rooms
The number of hotel rooms in Dubai is expected to grow by 30 per cent year on year until 2011, according to the latest report on the UAE economy by Swiss investment bank UBS.
"Given the efforts being made, particularly by Dubai, to become established as a regional and indeed international centre for leisure and tourism, the construction of retail and tourism facilities has seen tremendous growth in recent years.
"A number of huge shopping malls have opened in Dubai, with significant additional supply in the pipeline for 2008-10," it said.
UBS said it expects the supply of shopping mall space in Dubai "to jump from about 1.7 million square metres in 2007 to about 4.2 million square metres in 2010".
"The supply pipeline of retail and tourism facilities in Abu Dhabi is also strong, although on a less grandiose scale than in Dubai," the report added.
Two cities, two scenarios
The property situation in Abu Dhabi appears somewhat different, as the construction boom is less advanced there than in Dubai, UBS said in its latest report on the UAE economy.
"While plenty of new supply is expected to hit the Dubai market in 2009-10, peak supply additions in Abu Dhabi are not expected before 2010-11," UBS said.
By Staff Writer
© Emirates Business 24/7 2008
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