“Keep calm. There’s no bubble,” a giant poster on a 40-story building overlooking a Dubai highway proclaimed, advertising a property finding portal late last year. That may have been true at the time, but the risks are rising.
A leap in bank lending to the construction industry indicates financial institutions have resumed pouring money into real-estate projects in the past few months, after cutting back sharply in the wake of Dubai’s 2008 crash.
At the same time, real-estate prices have been soaring on the back of Dubai’s economic boom, which is increasing the chance of the market rising to unsustainable levels.
Photo: Reuters
Surging supply and unsustainable demand are a risky mix — the same combination that got Dubai into trouble six years ago, forcing state firms to reschedule tens of billions of US dollars of debt and jolting financial markets around the world.
This time, authorities say they are aware of the dangers, and they have taken regulatory steps to slow demand growth, but the steps are still modest compared with those by other global cities facing the same problem, such as Hong Kong and Singapore.
“It’s too early to be calling top, but credit growth of that pace tells you that the cycle is accelerating rapidly,” said Simon Williams, HSBC’s chief economist for the region.
“Such a huge increase in lending is simply not consistent with economic order and stable asset prices. The time for policy action is now, before bubbles really get going, not when they are already in place,” he said.
Dubai house prices posted the fastest year-on-year rise of any of the world’s major markets in the January-to-March quarter for the fourth straight quarter, soaring 27.7 percent, consultants Knight Frank said.
Rents rose about 30 percent on average in the same period.
The value of real-estate deals in Dubai, with a population of 2.3 million, jumped 38 percent in the first quarter to about 61 billion dirhams (US$16.6 billion), the Dubai Department of Land said.
There are good reasons for property prices to rise, including annual economic growth of about 5 percent and inflows of money from Arab investors seeking safety in a turbulent region.
While some prices have almost returned to their pre-crash peaks, they are well below some other global business cities.
Prime real estate in Dubai costs between US$6,200 and US$7,500 per square meter, against US$27,600 to US$33,700 in Singapore, Knight Frank said.
The volume of real-estate deals has not reached its pre-crash peak, but demand is showing signs of slowing.
Propsquare Real Estate said sales volumes so far this year were down about 25 percent year-on-year as prices become less affordable.
“The gap between what the seller is asking for a property and what the buyer is willing to pay is huge at the moment,” Propsquare chief executive Parvees Gafur said.
Yet the land department described the first-quarter surge in real-estate deals as “impressive” and looked forward to more.
The government fueled the current property boom when it announced plans, in November 2012, for a huge development including the world’s largest shopping mall, more than 100 hotels and a park almost one-third larger than London’s Hyde Park.
Meanwhile, most of the more than 200 man-made islands off Dubai laid out in the shape of a world map that symbolized the 2008 property market crash remain empty after state-owned developer Nakheel’s near debt default in 2009.
Authorities have taken some steps against price speculation and “flipping,” in which investors buy and sell properties — many of them unbuilt — in quick succession. Late last year, Dubai doubled the fee charged on property deals to 4 percent, while the United Arab Emirates central bank imposed caps on mortgage lending.
Some real-estate developers have taken their own action; partly state-owned Emaar Properties allows resale only after about 40 percent of payment for a property has been made.
Yet these steps are minor compared, for example, with a 15 percent fee imposed on the quick resale of property by Hong Kong and a 30 percent fee introduced by Singapore.
Last month, the IMF warned that Dubai might need to consider such tools as well.
The supply side of the equation looks equally uncertain. Plans for real-estate projects worth well over US$50 billion have been announced in Dubai over the past 18 months — but it is unclear how many will actually get built and how fast.
Major work is starting on some of them. After shrinking for 16 months in a row, construction loans in the UAE jumped 40.1 percent from a year earlier in December last year to 181 billion dirhams, the fastest rate since June 2009, latest central bank data show.
That far outpaced growth in total bank loans, which rose just 8.8 percent in December last year to 1.1 trillion dirhams. And the lending boom is probably just beginning.
“We foresee an acceleration of real-estate lending as developers launch new projects, and more local and expatriate customers seek to enter the mortgage market,” credit rating agency Standard & Poor’s said in a report last month.
A Dubai banker, declining to be named under briefing rules, noted increased risk-taking in funding to developers by local banks: “Some banks are offering 100 percent financing deals to firms on a selective basis. That’s not very sustainable.”
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