Dubai faces moment of truth over looming property bubble

Sun, Jun 15 01:12 AM EDT image By Martin Dokoupil and Praveen Menon DUBAI (Reuters) - "Keep calm. There's no bubble", proclaimed a giant poster on a 40-storey building overlooking a Dubai highway, advertising a property finding portal late last year. That may have been true at the time, but the risks are rising. A leap in bank lending to the construction industry indicates financial institutions have resumed pouring money into real estate projects in the last few months, after cutting back sharply in the wake of Dubai's 2008 crash. At the same time, property prices have been soaring on the back of Dubai's economic boom, increasing the chance of the market rising to unsustainable levels. Surging supply and unsustainable demand are a risky mix - the same combination that got Dubai into trouble six years ago, forcing state firms to reschedule tens of billions of dollars of debt and jolting financial markets around the world. This time, authorities say they are aware of the dangers, and they have taken regulatory steps to slow demand growth. But the steps are still modest compared to those by other global cities facing the same problem, such as Hong Kong and Singapore. "It's too early to be calling top, but credit growth of that pace tells you that the cycle is accelerating rapidly," said Simon Williams, HSBC's chief economist for the region. "Such a huge increase in lending is simply not consistent with economic order and stable asset prices. The time for policy action is now, before bubbles really get going, not when they are already in place." DEMAND Dubai house prices posted the fastest year-on-year rise of any of the world's major markets in January-March for the fourth straight quarter, soaring 27.7 percent, consultants Knight Frank said. Rents rose about 30 percent on average in the same period. The value of real estate deals in Dubai, with a population of 2.3 million, jumped 38 percent in the first quarter to some 61 billion dirhams ($16.6 billion), the Land Department said. There are good reasons for property prices to rise, including annual economic growth around 5 percent and inflows of money from Arab investors seeking safety in a turbulent region. While some prices have almost returned to their pre-crash peaks, they are well below some other global business cities. Prime real estate in Dubai costs between $6,200 and $7,500 per square meter ($580-700 per square foot), against $27,600-33,700 in Singapore, according to Knight Frank. The volume of real estate deals has not reached its pre-crash peak but demand is showing signs of slowing. Propsquare Real Estate said sales volumes so far this year were down about 25 percent year-on-year as prices become less affordable. "The gap between what the seller is asking for a property and what the buyer is willing to pay is huge at the moment," said Parvees Gafur, Propsquare's chief executive. Yet the Land Department described the first-quarter surge in real estate deals as "impressive" and looked forward to more. "We expect the next three quarters to be similarly active, especially as this period follows the launch of a number of stimulating economic projects in Dubai and the disclosure of some of the preparations for the city’s hosting of Expo 2020," said the department's Director General Sultan Butti Bin Merjen. The government fueled the current property boom when it announced plans, in November 2012, for a huge development including the world’s largest shopping mall, over 100 hotels and a park almost a third larger than London’s Hyde Park. Meanwhile, most of the more than 200 man-made islands off Dubai laid out in the shape of a world map that symbolized the 2008 property market crash remain empty after state-owned developer Nakheel's near debt default in 2009. Authorities have taken some steps against price speculation and "flipping", in which investors buy and sell properties - many of them unbuilt - in quick succession. Late last year, Dubai doubled the fee charged on property deals to 4 percent, while the UAE central bank imposed caps on mortgage lending. Some real estate developers have taken their own action; partly state-owned Emaar Properties allows resale only after about 40 percent of payment for a property has been made. But these steps are minor compared, for example, to a 15 percent fee imposed on the quick resale of property by Hong Kong and a 30 percent fee introduced by Singapore. Last month, the International Monetary Fund warned that Dubai might need to consider such tools as well. For now, it does not seem that the growth-hungry emirate has the will to act more aggressively. The history of the mortgage loan caps suggests it may not; the central bank watered down stricter curbs after complaints by commercial banks. In a statement on June 9, the Land Department insisted that the property market was broadly healthy, and that rising prices were simply due to a strong economy. In an annual stability report a week ago, the UAE central bank warned that the real estate market might be overheating. But it is unclear what further action it could take; with U.S. interest rates still ultra-low, any rate hike in the UAE is unlikely given the UAE dirham's peg to the U.S. dollar. SUPPLY The supply side of the equation looks equally uncertain. Plans for real estate projects worth well over $50 billion have been announced in Dubai over the past 18 months - but it is unclear how many will actually get built and how fast. Major work is starting on some of them. After shrinking for 16 months in a row, construction loans in the UAE jumped 40.1 percent from a year earlier in December to 181 billion dirhams, the fastest rate since June 2009, latest central bank data show. That far outpaced growth in total bank loans, which rose just 8.8 percent in December to 1.1 trillion dirhams. And the lending boom is probably just beginning. "We foresee an acceleration of real estate lending as developers launch new projects, and more local and expatriate customers seek to enter the mortgage market," credit rating agency Standard & Poor's said in a report last month. A Dubai banker, declining to be named under briefing rules, noted increased risk-taking in funding to developers by local banks: "Some banks are offering 100 percent financing deals to firms on a selective basis. That's not very sustainable." A return to the full excesses of the pre-2008 boom still looks unlikely. The crash cleared some second-tier developers out of the market, and the companies that remain still bear the balance sheet scars of the last crash; this should encourage at least some of them to be more cautious. There are signs that developers are paying more attention to their rivals' plans and implementing projects only in stages, proceeding with each one after reevaluating the demand outlook. "Supply is more coordinated" than it was in the past, said Fahd Iqbal, head of Middle East research at Credit Suisse. Nevertheless, the risks may be substantial in the next few years. Any sudden loss of confidence by a large proportion of foreign investors, or sharp tightening in U.S. monetary policy, could ignite a pull-back in the market, S&P said in its report. "What happened in 2013 was unsustainable. It is a big question mark whether or not we are going to have a sustained leveling off or whether it is going to pick up again," said Farouk Soussa, Citigroup's chief economist for the region. "In Dubai things change quickly. If they build...all these big projects...then I think we can start to get more concerned about another massive cycle in the property sector that might be unsustainable." (Additional reporting by David French; Editing by Andrew Torchia and Philippa Fletcher)

UPDATE 1-Emaar Properties to list mall unit on Dubai bourse

Mon, May 26 03:06 AM EDT (Adds details) DUBAI, May 26 (Reuters) - Dubai's Emaar Properties said on Monday it will list up to 25 percent of its malls business on the Dubai Financial Market (DFM), a shift from earlier plans to list on the emirate's smaller Nasdaq Dubai exchange. The builder of one the world's largest malls - Dubai Mall - said it had received regulatory approval for the primary listing of up to a quarter of Emaar Malls Group. Companies listing on DFM are normally required to float stakes of at least 55 percent but exceptions to the rule have been made in the past. Nasdaq Dubai has a much lower free float requirement of 25 percent, but it attracts less trading activity than the DFM and has only 10 listed equities. Timing of the offering and listing would be announced later, the statement said. It is expected to raise 8 to 9 billion dirhams ($2.18-$2.45 billion), making it one of the region's largest equity offers since 2008. Company officials previously said there might be a dual listing on Nasdaq Dubai, the smaller of the emirate's two exchanges, and on the London Stock Exchange. It was not clear whether the company still plans to list in London. Dubai luxury developer DAMAC, the only real estate firm from the emirate to list in London, got a lukewarm response to its share offering in a sign that international investors are still wary of the emirate's property market despite a recent recovery in prices. Sources told Reuters in April that the developer is talking to regulators about the possibility of listing its shopping malls unit on the DFM. The listing is a boost for the Dubai bourse where new IPO activity had died down after the emirate's financial crisis in 2009. A recovery in the economy has prompted more companies to consider new listings. (Reporting by Praveen Menon; Editing by David French and Jason Neely) ============================== UAE mid-table in property transparency index Lucy Barnard June 22, 2014 Updated: June 23, 2014 09:09:00 Dubai came 49th and Abu Dhabi 53th in a transparency index of 102 global real estate markets. ■ ‘Property booms are good for UAE economy’, says Damac boss ■ Dubai landlord insists on rent rise at any time if ‘Rera calculator says so’ Photos In pictures: Dh44 million penthouse at Elite Residence is ‘cheap’ ■ Dubai Courts list sheds light on 36 cancelled projects ■ Dubai and Abu Dhabi rental yields may indicate overheating, says UAE Central Bank The new table – which measured real estate markets, most of them national, based on the ease with which property could be bought, sold and valued – ranks Dubai and Abu Dhabi as retaining their places as the top two markets in the Middle East and North Africa. When the study was last conducted in 2012, Dubai ranked 47th and Abu Dhabi came 52nd out of 97. “The UAE has retained its position as the most transparent real estate market in the region, although there has been little further progress made over the past two years,” said JLL, the property consultancy that prepared the index. Overall, the UAE placed behind countries including India, China, Botswana and Thailand in the index. Libya came bottom of the table of the 102 countries surveyed, preceded by Senegal and Myanmar. JLL said that Dubai, which had featured among its “top improvers” in previous surveys “appeared to have lost some impetus” and to have been ”treading water” over the past couple of years. The assessment comes despite the Dubai Land Department putting forward a series of measures aimed at improving the legislative and regulatory environment in an attempt to avoid another real estate bubble. These include a doubling of property transfer fees last year, the announcement of unified real estate contracts and a move by the Central Bank to introduce loan- to-value ratios on mortgages. The report found that Abu Dhabi had a more regulated planning system than Dubai and the quality of real estate was higher than Dubai in several sectors, reinforcing Abu Dhabi’s position as the second most transparent market in the Mena region. However, the report found that there had been “disappointingly little progress elsewhere” in the region. “The Middle East and North Africa remains one of the least transparent regions in the world,” JLL said in its report. “Following encouraging signs of improvement in transparency prior to the global financial crisis, the region has not maintained momentum. While there is increasing recognition across Mena of the importance of improving real estate transparency, in most cases this has failed to translate into firm action.” The Dubai Land Department was unavailable to comment when contacted by The National, while Abu Dhabi’s Urban Planning Council declined to comment. A partner in real estate at the law firm DLA Piper said the emirates would benefit from updated property laws. “The fact that both Dubai and Abu Dhabi have not improved in the rankings in this report probably reflects the fact that there has not really been any new real estate legislation enacted in the emirates over the last two years,” Duncan Pickering said. “In Abu Dhabi the market has been expecting five new real estate laws since 2007 or 2008 on issues such as strata title, an interim register of off-plan sales and escrow accounts. In Dubai there are also laws which have been proposed but not enacted yet,” he said. “And there are a number of issues surrounding successfully implementing existing legislation.” Mr Pickering said transparency attracts investors by reducing perceived risk. “International investors take a global view and compare lots of different markets when they are deciding where to put their money,” he said. “They are usually attracted to markets which have higher levels of transparency so that they can reduce risk. At the moment this is a very competitive market with lots of countries attempting to attract that cash.” JLL singled out Qatar, placing the country on its global top 10 improvers list alongside Zambia, Serbia and Colombia. The improvement came after Qatar announced a new “open data” policy earlier this year which involves plans to release a large quantity of government held, non-personal data to residents and to improve public access to the land registry and other real estate data. Countries were given a composite score based on 115 individual data points and questions for each market. These were based around each country’s transaction processes, regulatory and legal transparency, governance of listed vehicles, the amount of reliable property market data available and the way in which property performance is measured. The United Kingdom retained top spot in the global survey, followed by the United States and Australia. JLL said that over the past two years, it had noted an improvement in transparency from more than 80 per cent of the markets it surveyed as developing countries attempt to attract inward investment to their real estate markets. “The world’s dominant commercial real estate markets are in better shape than at any time since the Global Financial Crisis of 2008-09,” JLL added. “Levels of capital markets activity are returning to pre-crisis levels and real estate investors are moving up the risk curve into new geographies and property types. Meanwhile, corporates are now executing long-term portfolio strategies and selectively extending their footprints into emerging markets.” “As momentum builds across the global real estate markets, investors, developers and corporate occupiers are demanding (and expecting) ever greater levels of real estate transparency – in terms of legal and regulatory enforcement, financial disclosure, fairness of transaction processes and access to high-quality market data and performance benchmarks.” lbarnard@thenational.ae Read more: http://www.thenational.ae/business/industry-insights/property/uae-midtable-in-property-transparency-index#ixzz35WbgCqVp Follow us: @TheNationalUAE on Twitter | thenational.ae on Facebook ==================================