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Thu 20 May 2010 03:22 PM

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Dubai debt deal little boost to property sector

Oversupply concerns in Dubai overshadow debt deal, according to analysts.

Dubai debt deal little boost to property sector
DUBAI DEAL: Indebted state-owned conglomerate Dubai World said on Thursday it had reached a deal in principal to restructure its debt with core bank creditors. (Getty Images)

Dubai's deal on restructuring $23.5 billion of debt will do little to kick-start lending in the emirate's battered property market, or alleviate the main concern of chronic oversupply, analysts said. Indebted state-owned conglomerate Dubai World said on Thursday it had reached a deal in principal to restructure its debt with core bank creditors, in a widely expected agreement.

Dubai sent global markets into turmoil at the end of last year when the conglomerate asked creditors for a standstill on debt mainly linked to its two property firms Nakheel and Limitless World.

It (the Dubai World deal) adds a little bit of comfort but there is still a crisis of confidence in terms of real estate," said Chet Riley, an analyst at Nomura in Dubai.

"It comes back to whether banks will start to take comfort in their loan books and comfort in real estate and start lending again to end-users and project finance. I can't see it being a catalyst for that," he added.

Confidence in Dubai's property sector took a hit in late 2008 when the global economic crisis saw house prices there plunge some 60 percent from their peaks.

Hundreds of cranes stood motionless as billions of dollars worth of projects, including developer Nakheel's planned kilometre-high tower, were put on hold or cancelled.

"From a capital perspective, overall, this deal is good in terms of sentiment," said an investment banker at a major international bank.

"But will we see banks lending more again? That's mostly a question of demand, it is a two-way street. How many people in this environment are willing to take on a new mortgage?"

Lending in Dubai's property market all but dried up, and has remained sparse, while investors awaited the recapitalisation of the emirate's two Islamic mortgage firms Amlak and Tamweel.

Shares in Amlak and Tamweel have not traded since their suspension in 2008, when the United Arab Emirates government said it intended to merge and restructure both.

"This was always a question of when and not if," said Ahmed Badr, Credit Suisse's lead real estate and construction analyst for the Middle East.

"It will be positive for construction firms like Arabtec but this has already been priced into the markets. Dubai still has the problem of oversupply," he said.

Arabtec, the United Arab Emirates' (UAE) largest builder by market value, signed on to Nakheel's debt repayment offer and urged others to follow suit, its chief executive said on Wednesday.

Nakheel trade creditors have been offered full repayment, with 40 percent in cash and the rest with an Islamic bond, or sukuk, which has a 10 percent annual return.

Dubai's residential market, already oversupplied by about 20 percent, would fall further with the addition of 41,000 homes between now and the end of the year, JP Grobbelaar, director of research and advisory at Colliers International, said on Tuesday.

Total office space will rise to about 6.4 million square meters by the end of 2011, from about 3.6 million square meters at the end of 2009, he said.

House prices are set to fall by 15 percent in 2010, Bank of America-Merrill Lynch said in a report on Monday, adding it sees 44,000 vacant homes in 2010. (Reuters)