Thursday 27 June 2019

Avalanche of new homes in Dubai extends property slump

Supply glut: 31,500 homes will probably be completed in Dubai this year, more than twice the city’s average annual demand over the last five years
Supply glut: 31,500 homes will probably be completed in Dubai this year, more than twice the city’s average annual demand over the last five years

Zainab Fattah

Dubai's homeowners will have to wait at least a couple more years for a long-running property slump to hit bottom as developers put a record number of new residences on the market this year.

About 31,500 homes will probably be completed this year, more than twice the city's average annual demand over the last five years, according to Craig Plumb, head of Middle East research at broker Jones Lang Lasalle. That compares with the 22,000 homes finished in 2018.

The Dubai property market's long decline since a peak in October 2014 has defied all predictions of a rebound over the last several years. While an oil price slump, fiscal austerity in Saudi Arabia and a strong dollar have driven away potential buyers, construction - much of it by state-controlled developers - hasn't slowed to meet the weaker demand.

Dubai's residential values have slid about 25pc from the 2014 peak, including a 10pc drop last year. JLL expects values to decline by 5pc to 10pc this year. Plumb said he doesn't expect the market to hit bottom until 2021, with the city getting a lift from the World Expo 2020 and the state officials possibly taking steps to stabilise the market by reining in construction.

The government owns the developer of man-made islands, Nakheel PJSC and Dubai Properties Group. It also holds 29pc of builder Emaar Properties. PJSC, which built the world's tallest tower in the city.

This time it's different

Ever since the first gleaming towers sprang out of the desert, Dubai has gotten used to rapid change. It's no stranger to boom-and-bust. What's happening now is different: a slow bleed.

The city's iconic builders are ploughing ahead. Cranes are everywhere. But no one is sure who'll occupy all that new retail and office space. Already, Dubai's malls are noticeably less full of stores and restaurants than they once were. Expatriates, the lifeblood of the economy, have started to pack up and go home - or at least talk about it, as the cost of living and doing business surges. Corporate mainstays, from Emirates airline to developer Emaar Properties, just reported disappointing third-quarter profits. The stock market is having its worst year since 2008.

Business unease was already apparent in April, when Sheikh Mohammed bin Rashid Al Maktoum convened a meeting with more than 100 executives in his palace overlooking the Persian Gulf.

The bosses raised issues including hefty government fees - which are eroding the comparative advantage of tax-free Dubai - to strict visa rules that push foreigners out when they lose their jobs. The conclave was followed by a flurry of decisions, still working their way through the system.

But a fix for what's ailing Dubai may be beyond the powers of its ruler. Sheikh Mohammed and his predecessors built a fishing village into a hub for finance, trade and tourism in the region - but now that region is changing, perhaps for good.

War or trade?

The oil slump since 2014 hit big spenders from other Gulf states who used to flock to Dubai (tourists from China and India are filling the gap, but they're more price-conscious). Saudis are feeling the pinch, as their own government imposes fiscal austerity and confiscates private wealth. The city's role as a trading post is being undermined by a global tariff war - and in particular by the US drive to shut down commerce with nearby Iran.

There's a deeper problem. Dubai prospered as a kind of Switzerland in the Gulf, a place to do business walled off from the often violent rivalries of the Middle East, says Jim Krane, author of the 2009 book City of Gold: Dubai and the Dream of Capitalism.

Now the state that Dubai is part of, the United Arab Emirates, has become an active player in those conflicts, fighting in civil wars from Libya to Yemen and joining the Saudi-led boycott of Qatar.

"It's a situation that Dubai finds itself in mostly through no fault of its own," says Krane. "You can go to war with your neighbours, or you can trade with them. It's really hard to do both."

Stories of Qatari citizens being ordered to leave the UAE shocked businesses that serviced the region from headquarters in Dubai. American executives were especially concerned about the prospect of being forced to pick sides, says Barbara Leaf, who was US ambassador in the UAE up until last March.

"It has cast a shadow," she says. "It was a very unpleasant surprise when UAE-based companies found out they could no longer fly or ship goods directly to Doha." The dispute rumbles on, even though the US is applying renewed pressure for a settlement.

That's not the only blowback from siding with the Saudis. When Crown Prince Mohammed Bin Salman rounded up dozens of leading Saudi royals and businessmen at the Ritz-Carlton hotel in a supposed crackdown on corruption, the UAE central bank asked the country's financial institutions to provide information on the accounts of some of those held.

Investors are worried, says Krane. Governments "shouldn't be able to access accounts in other countries based on a simple request".

Dubai also faces consequences of its own success. Lacking energy resources of its own, the city had little choice but to build a non-oil economy.

The 2014 crash jolted other Gulf countries too They're all planning for a post-crude era, and trying to emulate their thriving neighbour by marketing their own capitals as regional hubs. Dubai remains preeminent in that role.

But it's an increasingly high-cost base. In 2013, it ranked as the 90th most expensive place for expats to live, according to New York-based consultant, Mercer. It's now vaulted to 26th on the list.


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