Seasoned observers will remember how the Dubai Government floated 20 per cent of the Dubai Ports World ports operator on the London Stock Exchange and Nasdaq Dubai in October 2007 just before the global financial crisis struck. It proved a great moment to be a seller – but not such good news for the buyers, who are still out of pocket on this IPO almost seven years later.
With luck buyers of the Emirates Reit IPO whose shares listed on the Nasdaq Dubai this week will fare better. Global stock markets do look high again but Dubai real estate is very hot and so are Dubai shares. This is the first real estate investment trust for the UAE.
These property-owning mutual funds are popular around the world. Reits own and manage property and distribute rental yields to their shareholders.
Last year Dubai real estate topped some global league tables for house price inflation, and shares on the local Dubai Financial Market have risen more than 135 per cent year-on-year. However, there is a shade of DP World here.
The Emirates Reit has loaded up on Dubai commercial property over the past three years with some astute timing of its purchases. It has made money on the price recovery and now it is selling shares to shareholders that fully reflect that property value appreciation. Nothing wrong with that, of course, and the new money will go to refinance the Reit and to assist with further purchases, albeit those will probably not be quite such good deals.
The problem is the Dubai property cycle. The recent uptrend began after Dubai World signed off its US$25 billion debt rescheduling in late August 2011. That makes it just five months away from completing a three-year cycle, and that’s the typical length of most real estate market cycles. Usually the cycle is slow to get moving, is fastest in the middle and flattens out towards the end.
Dubai real estate prices and rentals peaked last September and have drifted sideways for the past six months. A few distressed sellers are now dropping their prices and that should lead the market lower over the summer.
Last autumn a doubling of transfer taxes and a hike in mortgage lending ratios checked the rising market in its tracks. Year three of the cycle was always going to be slower anyhow. This just knocked it firmly on the head and prices and rentals have gone nowhere since then. Ask any agent.
At the same time a renaissance in off-plan property sales from both the top Dubai developers and others has taken investment capital away from the existing housing stock and encouraged speculators to try their luck again. They seem to have been quick to forget how off-plan buyers suffered in the 2009 crash.
The flow of funds into Dubai from China and the wider Middle East has also waned with the squeeze on credit in China and the return of military rule in Egypt seeming to mark the end of the Arab Spring. Only the Russians keep on buying.
A correction looms. I very much doubt this will be a repeat of the late 2008-09 apocalypse with a 60 per cent slump in Dubai house prices. But it could well be a more usual 20 to 30 per cent cyclical market correction.
That’s what often happens in real estate: a market runs away with its own enthusiasm as new money rushes in and then, when the would-be buyers have all bought, the prices fall back. Dubai’s boom has been nothing like as exuberant as in 2003-08 with its Ponzi-style bubble in off-plan sales, so there is no reason to expect a similar crash this time around.
At the same I would suggest waiting for the right moment to invest in Dubai property and the new Emirates Reit. With new completions still running at a fair tilt there could again be some bargains to be had as this cycle runs its course.
Local and global confidence in the city has got a bit ahead of economic reality in the wave of euphoria after winning the Expo 2020. That’s six years away and a slowdown in the world economy led by China and Japan is a more imminent prospect that will not be good for a trading hub city like Dubai. Some of the recent investments in hotels and aircraft may also turn into overcapacity issues rather than instant success stories.
Longer term, I still think Dubai real estate is an excellent investment proposition because the city will continue to rise up the league table of major regional hubs and its property prices will follow. But property cycles go down as well as up.
Peter Cooper is the editor of ArabianMoney.Net
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