Dubai property market strong, but faces challenges

EMERGING MARKETS REPORT

By Joyce Koh, MarketWatch

New York (MarketWatch) -- The booming Dubai's property market will remain strong this year, but supply could overtake demand as soon as next year unless moderated by project delays and market management, said Fitch Ratings in a report published Wednesday.

The ratings agency said the number of new homes entering the market will reach record highs in 2009 and 2010.

At the same time, office supply will continue unabated as more financial institutions are expected to set up regional offices and expand their existing ones, Fitch said, adding that a glut of office space could take place in the same period.
To illustrate the frenzied building going on, Fitch said the emirate, with 1.6 million people, has as much commercial property under construction as Shanghai and Moscow, which have respectively 13 times and seven times Dubai's population.

"Many challenges have begun to surface, mainly the prospect of oversupply -- if current delivery plans are met -- and the risk of being unable to stimulate demand in view of massive development projects in the pipeline," said Bashar Al Natoor, a director in Fitch's corporate team.


Still, Fitch expects ratings to remain stable for Dubai Holding Commercial Operations Group LLC, which has an AA- rating, and Gulf General Investment Company P.S.C., which has a BBB rating.


Still Booming
Those on the ground however say demand is still robust, with expanding population, rising incomes, and increasing mortgage availability among the factors underpinning growth in the Gulf region.

"People are investing from everywhere in the world, and they are just buying and renting," said Ahmed Mostafa, a real estate agent with Dubai-based Murano Real Estate. "Prices go up from 2 to 10% every two weeks. People are still buying now, because they are scared prices will go up the next week."

"This is a very young market, where foreigners could actually start purchasing property from 2002," said Rupert Neil Bumfrey, an advisor to emerging markets asset-management companies, on the attraction of the market. "From the viewpoint of the people who are actually purchasing, Dubai has the infrastructure that actually works."


Emerging Market Risks
Indeed, Fitch noted that with the government holding an estimated 50% of supply over the next few years, it is "difficult to envisage that the authorities will deliberately flood the market with supply and erode market fundamentals and their own projects' profitability."

External factors could derail the market however.
Fitch said the impact of the credit crunch and subprime lending crisis on the Dubai real estate market is another concern, which is magnified since the demand is driven by expatriates and foreign investment.

"Foreign demand is the main driver, and Dubai's ability to continue attracting investment is the fundamental success factor," said Fitch Bashar al-Natoor, the author of the report.

He said the magnitude of price corrections, if and when they occur, could be substantial given the emerging nature of the property market, and the magnitude dependent on the number of speculators and short-term holders.

"What happens in Iran is going to affect the market. Everything will keep growing, the huge firms will keep coming, but everything will also depend on the political issues," said Mostafa.

Fitch said a key tool to act as a mitigating factor against over-supply is improving regulation of the local market as well as better transparency and production of dependable and comprehensive real estate market data.

"A lot of people can come, but they might not know where to go or what to do," said Montasir El Naeim, a property agent at Murano Real Estate Brokerage. "The government is trying to help, but things in the market are moving faster and faster. The main problem is how to manage all these things, from regulation, visa issues to registration." \
Joyce Koh is a MarketWatch intern in New York.