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Sun 12 Oct 2008 04:00 AM

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The height of caution

With a global financial crisis looming, there has been plenty of speculation on what type of impact it will have on the UAE’s economy, if any, and whether its real estate industry in particular will be able to weather the storm.

With a global financial crisis looming, there has been plenty of speculation on what type of impact it will have on the UAE’s economy, if any, and whether its real estate industry in particular will be able to weather the storm.

After all, we live in an era of globalization where nearly every economy is in some way interlinked, and so despite the economic boom we have been enjoying, it certainly begs the question whether the local property market can continue unscathed by recent events.

Financial institutions have extensive cross-border links nowadays and investment is no longer limited by borders.  The recent plunge in UAE stock prices only reaffirms that while the country remains relatively shielded from the global economic downturn, it is still exposed to certain risks.

End users are already less likely to buy off plan as they are looking for either a place to live or to generate rental income to support mortgage payments.

Foreign investors have been hit hard recently and institutions relying on funding from outside the UAE will face much higher interest rates.  In turn, banks are likely to be more conservative in their mortgage lending until confidence in global markets is regained.

With this heightened caution expected to last as long as the recession endures, there is growing interest in whether the banks will have the liquidity to finance the whopping number of properties coming to fruition in the next 24 months, valued most recently at nearly US$73.5bn.

To fill the financing gap, local and international banks may decide to shift a large bulk of their lending capital from unsecured institutional lending into home mortgages to accommodate this surge and growing market need for home financing.

The global financial crisis will also likely cool off some of the market frenzy that has driven speculators to leap at anything that is launched, driving up real estate prices artificially by buying up property and quickly reselling for a profit, otherwise known as "flipping."

It is widely believed that a decrease in flipping, with the help of recent government regulations, will not only help stabilize property prices, but ease the demand for the off-plan market, igniting a trend that would ultimately encourage more end users to come onto the market.

End users are already less likely to buy off plan as they are looking for either a place to live or to generate rental income to support mortgage payments. Financing is generally more difficult for off-plan buyers as the banks are increasingly reluctant to lend against a property that has yet to be built.

The enthusiasm for buying off-plan is waning amid skepticism that, with construction delays not uncommon, there is only an incremental difference between the price of buying in the initial stages of a development and the actual price of buying upon completion.

Overall, concerns about the state of the global economy have prompted a new wave of property buyers in the UAE who are more cautious than usual, demanding more value for their money and foregoing short term gains in favor of longer-term stability.

For perhaps the first time ever, investors are setting up contingency plans in case the market goes down and are starting to question its long-term viability. Buyers are starting to look past the hype and seek out developments which can provide superior quality and steady returns.

From the point of view of developers, rising prices for raw materials - often sourced globally - is putting pressure on construction costs, challenging them to build quality developments without major delays in the midst of rapid inflation.

Despite these inflationary pressures, the pace of real estate development in the UAE shows no signs of slowing down and the mortgage market will continue to prosper as long as property demand remains high and systems are put in place for long-term transparency and growth.

Overall, the UAE government and banking system has done well in protecting the real estate market while mitigating the impact of the global financial crisis. Luckily, most of the banks avoided exposure to sub-prime lending, widely considered at the root of the chaos.

However, it is difficult to predict how market dynamics will unfold because we are operating in a developed market against forces which are so unique. How can the UAE emulate best practices from abroad when the world's biggest economies are so volatile?

At a time when we would normally look abroad for guidance, we are in unchartered waters. Ultimately, we will just have to wait and see how global market forces play out against the backdrop of a seemingly unstoppable local real estate boom.

By Chris Dommett, CEO of John Charcol Dubai.

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