Dubai property prices - why the only way is up

Walking through the streets of Monaco, as one does, in between poking my nose into the nearest patisseries in search of the ultimate croissant, I came across a very familiar Dubai phenomenon - breathtaking, tear inducing property prices.

For those that don't know Monaco is a small sovereign city-state located in on the northern coast of the Mediterranean Sea. What makes it particularly interesting for us is that despite being completely enclosed by a high taxation country - France - its inhabitants pay no income tax at all.

That gives its two million square metres of land real scarcity value, and explains why a two bedroom apartment in the centre of Monaco costs upwards of two and half million euros, while a similar property 40km along the coast in Nice costs 'just' Eu 250,000 plus - almost a tenth of the price.

For those who have invested in Dubai's property market, or are thinking of doing so the world’s most densely populated sovereign country could be used to reduce what marketers, always in search of ways to sound clever, describe as buyer dissonance - the fear, immediately after you have handed over a large amount of money, that you have just made a huge mistake.

In the GCC housing market the dissonance can be deafening. That is because the Gulf represents a new market in terms of property, and there are no long term trend lines to provide an historical footing to prices. The only guide as to what a house is worth is what people are willing to pay.

In certain parts of the region, but most particularly in Dubai, that price has risen daily. A deal that looks expensive in the morning, can be a bargain by the end of the day - certainly by the end of the week. That makes the region's one measure of a property's worth look distinctly subjective - and in times of a global slowdown unnervingly flimsy.

Comparisons to other world markets provide some justification to prices. Dubai increasingly sees itself as part of a select group of global cities, and if you buy into that, the emirate's cost per square foot still looks low compared to the world's most expensive: London, New York, Moscow and Paris.

But that situation is changing. As the global real estate markets contract as mortgages dry up, and as the GCC property market continues its boom, the gap is closing fast. Another double digit spurt and Dubai could find itself with the dubious honour of ranking within the top 10, perhaps five most expensive cities in the world.

A quick look at www.arabiabbusiness.com/property gives you an overview of the Dubai market. An average 80 square metre apartment in the Old Town, one of the more swanky areas of new Dubai, presently sells for around US 11,000 per square metre.

That is a breath away from the very top end of Paris’ property prices which sell for around $13,500 per square metre, or Moscow's which sell for $15,000 a square metre.

The only bit of daylight between Dubai and any other city is between it and London, where the top end of the market sells for $18,000 per square metre. But, and here is the kicker, the more bearish analysts expect prices in UK capital to fall by up to 40% over the next eighteen months or so.

In other words within the next eighteen months or so, it is not impossible that Dubai takes on the mantle of the world's most expensive city.

This begs the question – how much more growth can there possibly be? How can speculators continue to invest in a market that appears to be if not over-inflated, at least at the top of the curve.

Those that have invested in Dubai tend to be very optimistic –in part because they have known only spectacular gain. The question is whether their continued confidence is irrationally exuberant, or based on the deeper understanding of how "this time it's different" – that Dubai, like Monaco, is really a case apart.

Or more simply, what do they know that we do not?

Dubai certainly offers unique advantages in the region, but unlike Monaco's they cannot be measured. In Monaco the calculation is simple maths. For those whose value is measured in the millions, a high property price is a loss leader for not paying any income tax on their earnings.

In the GCC Dubai does not offer any tax advantage. Instead Dubai’s speculators are betting on something considerably more subjective – that the city’s mix of economic opportunity and social openness and flexibility makes it the only place in the region people want to live, and the only place companies want to base their operations.

And they have a point. Dubai may be far from the most beautiful or interesting city in the world, but it is undoubtedly the easiest and safest in a region that everyone wants to be part of. What other city in this region is so open and welcoming to different cultures and lifestyles as Dubai? What other city is so open to international companies and expatriates and their ways. What other city offers such ready made and powerful clusters of industries and service sectors. Answer: none.

In short, Dubai's property will continue to rise in value because there is no alternative for companies or for individuals - Moslem and non-Moslem - looking for a Middle East home.

That may make Dubai's properties seem out of kilter to any intrinsic value or common sense, but the law of scarcity, and of supply and demand, mean that so long as other cities in the region are perceived as slow, backward, hostile, inflexible or a combination of the above, Dubai’s property prices will continue their inexorable rise, leaving its speculators much to gain.