Construction sites are buzzing with work across the Persian Gulf sheikdom of Dubai more than two years after the financial crisis set off a real-estate slump that caused values to fall by more than 60pc.
In the next two years, tens of thousands of new properties will come on to a market where about 40pc of homes and offices are empty.
Developers have chosen to complete projects started before Dubai's property market collapsed rather than cancelling them and facing a legal obligation to return all advance payments to customers. Falling construction costs and low interest rates also provide an incentive to build now rather than wait for property values to increase.
"The cost of walking away from these projects is much higher than completing them," said Ahmed Badr, head of Middle East real estate research at Credit Suisse Group AG. "Developers would rather build and get some of their investment back than stop and be forced to pay buyers back while their projects stand half-built."
Homebuyers in Dubai typically pay 10pc upfront and make further installments based on how much work is completed. That means a developer that sold a home before the crash and collected 50pc of the price so far would have to pay back more than the property's current value if the project was cancelled. Average prices in the emirate have dropped 62pc psince the peak, Deutsche Bank said this month.
As many as 48,000 homes will be completed in the next two years, increasing current supply by 12pc, Landmark Advisory estimates.
London-based real estate broker Cluttons LLC predicts that 35,000 will be completed through 2012, prolonging the price slump for another 18 months.
"Developers who launched projects and took money have entered into contracts with purchasers and those contracts have timeframes," said Michael Lunjevich, a partner at Dubai-based Hadef & Partners. "If a developer doesn't deliver, the buyer can sue and ask for the contract to be terminated and the money returned."
The new homes are coming on to a market that's being shunned by buyers. Residential transactions declined 53pc by volume and 65pc by value in the year through September, according to Jones Lang.
Political turmoil in Middle East and North African countries may prompt companies to move staff to more stable places like Dubai, said Matthew Green, head of United Arab Emirates research at CB Richard Ellis Group. That could boost housing demand in the sheikhdom, he said.
"The longer the instability in the region goes on, the more attractive Dubai will be for companies," he said. "Demand for housing will only be revived on the back of expansion in the commercial sector."
The backlog of unfinished projects is a legacy of Dubai's rapid rise and fall. The sheikhdom had the world's fastest-growing property market from 2006 to mid-2008 because of rising demand from a growing expatriate workforce and speculation fuelled by borrowing. Prices quadrupled in the six years following the 2002 decision to allow foreign ownership of property in designated areas.
That ended after Lehman Brothers collapsed in September 2008, setting off the global financial crisis.
Banks across the United Arab Emirates soon stopped lending and two months later shares of the country's two biggest mortgage lenders, Amlak Finance and Tamweel were suspended.
Speculators caught with multiple properties and little chance to turn a profit fled the market and defaulted on purchases. Other buyers continued to honour their contracts, often paying installments even after work was halted in the aftermath of the crisis.
About 50pc of Dubai real-estate projects were cancelled or suspended after the collapse.
"There is a reputation factor here," said Mala Pancholia, a Dubai-based analyst at NBK Capital. "If you finish a project in a down market, there is a trust factor that you can build with customers."
Building costs have dropped by more than 40pc from their peak in 2008, giving developers another motivation to restart work now, Ms Pancholia said.
"Since construction costs are so cheap, it makes sense for the developer to finish the project at the lowest possible cost now, rather than wait until there is a recovery," she said. (Bloomberg)