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Dubai Bubble Burst

Now the downward spiral begins for Dubai

Hazel Heyer, eTN Staff Writer  Feb 17, 2009

Once thought of as the forever-booming emirate of Dubai has proven that it, too, is not recession-proof or immune to the global downturn. With all states of the United Arab Emirates (UAE), it seems recession has caught up contrary to forecasts made by top real estate advisory groups such as Jones Lang LaSalle who said that the markets of the Middle East will outperform all other regions of the world in the next 1 to 2 years. The firm polled 350 top developers who believed late 2008 that the UAE will offer the best performing real estate market if not in the Middle East, then in the world.

The group even released their first official Investor Sentiment Survey at the foremost real estate show CityScape Dubai. It was sent out in the aftermath of the crash of US Investment Bank and Lehman Brothers. It highlighted the fact that almost 50 percent of those surveyed believe the UAE will offer the best performing real estate market over this year and the next, saying investors are confident about the future performance of the Dubai and Abu Dhabi markets.

Two months into 2009, we now know that the experts’ forecasts weren’t exactly right. To land us back to reality about Dubai, the so-called City of Gold, expatriate workers are losing their jobs and are being sent home. Lately, it has been reported that Dubai has canceled over 86 percent more residence visas last month, compared to same month last year. Data from Dubai’s Ministry of Interior Naturalization & Residency (DNRD) shows that 54,684 residency visas were canceled during the month of January, compared with 29,418 in January 2008. This is running at a rate of 1,764 visas per day. However, the number of new residency visas issued in January was higher than the number canceled, with 88,423 visas being approved, reported the DNRD.

The alarming rate at which the Gulf state is laying-off people and repatriating them could be disastrous for an economy run and operated by overseas contract workers. Experts there believe the saving grace will come from the staying power of mid-range properties whose values show little sign of significantly softening ironically despite the economic slowdown. Development specialists say affordable homes from mid-income bracket will drive sales of mid-range properties.

Now that speculators have either already fled the market/ country or have been exposed to negative equity and or unsustainable payment plans, opportunity knocks especially for new buyers with aspirations as owner-occupiers. “What we have already seen is a significant reduction in the selling price of high end properties, especially those that had increased substantially. This is normal, the higher you climb, the harder you fall,” said Mohammed Nimer, CEO of Moafaq Al Gaddah Group of Companies (MAG Group) Property Development.

Back in October, before the serious correction in the UAE real estate market was felt, MAG said it will be in high-end property values that suffer most rather than mid-range. Even before seeing the warning signs of the downside correction, Nimmer already warned the market that it will be the luxury properties - which were more attractive to speculators - that will be hardest hit. In comparison, the mid-range market will be more stable as people are buying mid-range apartments; they are owner-occupiers, doing so in the main to live in them as homes rather than looking for short-term gains.

"In comparison, the mid-range market has been more stable and when the inevitable upturn comes, people buying mid-range apartments as owner-occupiers, will drive that market segment," he added, saying further, “Naturally there are still Issues of liquidity and banks will need to start lending to prospective buyers. However, with a recent history of relatively stable prices and monthly payments more inline if not cheaper than some rental prices, I am confident that the moderately priced real estate will recover quicker than the luxury end of the spectrum.”

In Dubai, many industry commentators have been caught out trying to predict which way the real estate market was headed. “I believe that the market here began to stall in late June 2008. But because of the two-month summer break, followed by Ramadan and the Eid holidays, nobody really felt it until October 2008,” said the MAG Group chief who feels confident Dubai will start to see a recovery by late this year or early next year.

“The Dubai real estate market in particular has witnessed the more unsavory side of property development. Financial irregularities, land ownership disputes, cancelled and delayed projects and poor quality finishes…Today, people are looking for is affordability, quality and a pleasant home to live in and bring up their families," Nimmer said.

Now the downward spiral begins for Dubai
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