Dubai World's announcement that it would use part of the Abu Dhabi Government rescue package to start paying off debts to contractors and suppliers could provide a liquidity boost to the battered property sector in the coming months. This will be crucial as distressed asset funds look for opportunities to finance the completion of buildings and acquire discounted property that could rise in value in the coming years.
One thing it will not do is fix the fundamental problems of property development and sales, which are rooted in a low demand for homes - especially those still being built - and a lack of financing for buyers and developers. But the payments will calm fears that had grown about Dubai in the past two weeks and create conditions that will allow for a recovery to begin to take hold, even if that recovery may be still more than a year away.
When developers such as Nakheel began having financial trouble late last year, it had repercussions all the way down the supply chain. Construction companies and other service providers across Dubai stopped receiving payments for work as early as September last year, leading some to become insolvent and disappear. Others have pared down operations and begun focusing more on nearby countries such as Saudi Arabia and Qatar, which have been less affected by the downturn over the past year.
The payment problem also affected regional banks, which had lent money to the construction companies. Yesterday, the Dubai Financial Support Fund announced it would receive US$10 billion (Dh36.72bn) from the Abu Dhabi Government to be used to help Dubai World deal with its obligations. As a first step, the money would be used to pay off a $3.5bn sukuk, plus profit, that came due yesterday. But a portion of the funds would also be spent to deal with Dubai World's other obligations.
"The remainder of the funds provided will be used for the satisfaction of obligations to existing trade creditors and contractors," said a statement from Sheikh Ahmed bin Saeed Al Maktoum, the chairman of the Dubai Supreme Fiscal Committee. "Discussions with affected contractors will begin in short order." These discussions will be a welcome relief for these companies, some of which have been teetering on the edge of bankruptcy.