Given the financial crisis Dubai faced in 2008-2009, you could be forgiven for assuming that a recovery in real estate prices in the emirate were a good indicator that things were getting back on track.
However, a recent report from the International Monetary Fund (IMF) took a slightly different tack. Highlighting a sixteen percent rise in residential prices in the year up until April, the IMF was quick to warn that further hikes could revive fears of a property bubble similar to that which precipitated the last crash.
There has been at least one attempt to head off this possibility. The UAE central bank last year tried — unsuccessfully — introducing measures to curb speculation and unrealistic increases in real estate prices. A proposed mortgage cap would have meant that home loan lending would be restricted to 50 percent of sales price to foreign buyers and 70 percent for UAE nationals. This plan was put on ice temporarily though after commercial lenders in the Gulf state complained that their business would suffer as a result.
The central bank has now gone back to the negotiating table and is expected to come up with a revised set of lending limits later in the year.
It is unlikely that even this will be enough to curb speculative activity, however. It is estimated that up to 70 percent to 80 percent of Dubai’s property transactions are cash-based, equating about $30bn in real money per year. Given this scenario, it is unclear how effective a ceiling on home loan lending would be.
One way to curb speculation could be to take a leaf out of Hong Kong’s book. Facing soaring property prices in the cramped territory, the government there has introduced a raft of measures including higher stamp duty for foreign buyers and increasing taxes on properties sold on within six months. These are in addition to a number of limitations regarding home loan lending.
Harald Finger, the IMF mission chief in the UAE, made a similar suggestion following the publication of the fund’s latest report. Finger said he had discussed with UAE officials the possibility of increasing levies on real estate activity, although this had been met with concerns that such a plan could erode the emirate’s competitiveness. Fees on transactions are currently set at about two percent.
It is not just its competitive edge that Dubai should be worrying about though. According to IMF estimates, Dubai and its government-related entities have about $64bn in debts maturing between 2014 and 2016. Taking a larger cut of property transactions would be one way of putting a dent in the emirate’s debt pile.
At this moment though, concerns over Dubai’s ability to pay back what it owes do not appear to run too deep. In recent months it has announced a string of so-called ‘megaprojects’ which include the humongous mixed-use Mohammed Bin Rashid City complex, as well as a new artificial island development. Both will require billions of dollars worth of investment. A fall in Dubai bond yields last year also underlined market confidence in the emirate’s capability to repay its debts.
Payback time
Investors who lost money in Dubai’s last property boom to developments that were never completed may finally be about to get some of their cash back. A legal committee has been established that will liquidate cancelled projects and settle disputes with investors.
That Dubai is taking steps to make amends for one of the darker aspects of the 2008-2009 financial crisis is commendable, but it remains to be seen how effective this mechanism will be.
Many of the emirate’s most notorious projects that never were — such as Dubai Waterfront and Palm Jebel Ali — have never officially been scrapped, instead remaining perennially on-hold.
With a number of unscrupulous developers having long packed their bags and skipped town, squeezing them for the cash they owe may prove next to impossible.
Daniel Shane is the Deputy Editor of Arabian Business.
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