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Sun 10 Aug 2008 04:00 AM

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Is the Gulf ready for home-grown subprime?

Price inflation in the real estate market needs to slow down otherwise the consequences could be severe.

Sixteen months ago at a small and uneventful property conference held in Dubai, a Citigroup banker delivering a speech about real estate investment trusts, finished his presentation with a throwaway remark that went unreported by the media in attendance.

He said that defaulting subprime mortgages in the US that were then starting to emerge, risked spreading throughout the world, making it "harder and more expensive" for people to borrow.

A year after subprime hit, after $12bn of writedowns at Citigroup, and $400bn in credit losses globally, his words seem more prophetic than even he would have imagined. He no longer works at the bank - like about 7000 others whose jobs have been lost or are in the process of being lost there.

A few of them may be looking for new work in the financial hubs of the Gulf, where the local units of many international lenders are helping to compensate for the losses being incurred elsewhere.

Profits are rolling in and recruitment is booming across retail banking, wealth management and brokerage. Most of the income now being generated has been driven by the rampant growth in consumer lending and mortgages.

No danger then, of people finding it "harder and more expensive to borrow" here - or at least not just yet.

That could change quickly. The Dubai real estate market, where residential property prices have advanced almost 80 percent since the start of 2007, is key to the future fortunes of other Gulf property markets. It's where all the ripples emanate from and is a bellwether of the industry's regional health.

Nakheel's move to curb speculation on the Palm's Trump Tower last week by forcing investors to hold property for at least a year before selling it on, might appear draconian and interventionist at first glance.

But desperate times may require desperate measures. The rampant price inflation that the market has witnessed in recent months needs to slow down. Otherwise the consequences for the local and regional economy could be severe.

Morgan Stanley predicts that prices in the emirate could fall by 10 percent by 2010 as an oversupply of units begins to drag yields down.

The prediction follows similar warnings from Standard Chartered Bank that speculators are overheating the market. It recommended the introduction of a capital gains tax to check the increases.

Subprime may not have infected Gulf economies yet in the same way that it has spread through other financial markets, but who's to say that the region won't produce its own home-grown strain of the contagion if real estate and retail bank lending is allowed to continue to escalate unchecked?

Sean Cronin is the editor-in-chief of Arabian Business English.

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Jehan 11 years ago

Banks, and and financing companies have started to apply the credit check on the defaulters through the relatively new credit information company (Emcredit), which was established by the instructions of his highness Sheikh Mohammed Bin Rashed, to minimize the defaulting, over debts, and fraud. Some big Real Estate companies are also using this same tool to do the defaulting check up before accepting cheques when leasing apartments. Soon enough all banks, financing houses, and real estate companies will be doing this check before lending, or accepting any cheques.

Trojan 11 years ago

This banker's comments were not as prophetic as they might seem; these warnings have been sounded off for more than a year in the West. But as usual, no one cares to listen around here; we get arrogant and complacent by our hallow "success". Apparently, still no one cares to listen or pay attention and we remain focused on the short-term and making a quick buck. In a market where transparency and accurate statistics are non-existant, how can anyone say there is no oversupply? What is the basis for this conclusion? For those who care to be a little observant, there seems to be ALREADY an oversupply. Just look at how many units are occupied at any of those big developments, from JBR and Uptown Merdif, to Arabian Ranches and Palm Island. You don't have to knock doors to find out, just drive around at night and notice how many lights are out. And for those who care to pay attention to the news, many worrying signs are already emerging, symptoms that were reported in stories on this site: the sudden jump in interest rates in the span of a month, the run away consumer and mortgage lending...etc. And don't forget high inflation, which leads to even more speculation as people's expectations of higher future prices forces them to buy today despite the high prices, thereby driving prices even higher. I am afraid that a credit checking service is not going to quite cut it, that will be more like a temporary bandage. The US has the world's most elaborate credit reporting services; yet, that did not stop it from falling into this severe credit crises. The needed reforms are far more substantial than that, and monetary policy is at the heart of any serious remedy. But until government (particularly Dubai's) gets out of the real estate business, there just will be no motivation to change the status quo.