Property market faces oversupply, foreign demand risks

Dubai’s real estate market faces challenges such as the risk of oversupply and inflows of foreign investment in the coming years that could hit demand for property in the emirate, Fitch Ratings said on Wednesday.

The ratings agency said in a report the overall state of Dubai’s real estate market remains strong, but factors including oversupply, foreign demand and competition from other cities in the region could see a downturn in the market.

Other factors such as speculation, project delays/cancellations, impact of the subprime mortgage crisis and global credit crunch, geopolitical tension, and market regulation could also affect how sever any market correction would be, Fitch said.

The agency said the prospect of oversupply and the risk of being unable to stimulate demand for the massive development projects in the pipeline were the biggest challenges.

But it added the "high probability" of late delivery and even cancellation of projects could actually work in the market's favour by resulting in a better match between supply and demand.

Fitch highlighted foreign demand as another big challenge, stating that a geopolitical deterioration or real estate downturn may hit the influx of foreign investment and "could be more damaging to the economy than the correction in stock markets which took place in 2006".

However, Fitch said the outlook for Dubai's real estate sector, and that of the wider Gulf region, should remain sound due to strong GDP growth, rising income levels, healthy liquidity, rapid population expansion and increasing mortgage availability.

Property prices also still significantly below those in other major cities such as New York and London, it added.

Fitch said it expects strong revenue growth to continue for real estate companies in Dubai, but added delivery and execution risk would become more marked, especially if labour and materials shortages turn into a prominent risk.

It said the affect of any downturn in the market on developers, and the affect on their credit rating, would depend on the proportion of off-plan sales in their portfolio.

Fitch said any downturn would impact on developers' revenues, which could also affect their credit ratings.

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