Is Dubai the next Florida?

Is Dubai the next Florida?

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Continued delays in the completion of residential property projects in Dubai this year will continue in 2008, while a price correction is most likely in 2009 when supply exceeds demand, according to a new market report. “We believe that the delay in property handovers seen in 2007 will likely continue over the next 12 to 18 months,” investment bank EFG Hermes said in its UAE outlook report for 2008.

EFG are forecasting prices to rise by between 5 and 10% next year but suggest they are likely to peak in the second half of the year when property supply rises. The gap in supply in 2007 was roughly 20,000 residential units worth Dh34 billion said housing finance firm Tamweel. They are also predicting about 50,000 units of supply, with a demand of 54,000 units in 2008, taking the aggregate shortage to 24,000 units.

But, in contrast, EFG expects 25,000 units to be delivered during 2007, 64,000 in 2008 and 68,000 in 2009.

“We expect prices will begin declining in 2009 once supply peaks, with a cumulative decline of 15 per cent to 20 per cent between 2009 and 2011,” said EFG.

Prices for both villas and apartments rose 18.7 per cent in the first 11 months of 2007, which was above expectations. The weakening of the dirham due to its peg with the US dollar and improved local real estate regulations are seen as boosting international demand for UAE property.

However, there is a fear that the current lack of confidence in most developed countries could eventually spread to emerging markets in the region. “This adds an element of uncertainty to our demand forecast, since it could potentially cause property prices to decline sooner than expected,” the report said.

But some pundits are suggesting this is overbuilding on a scale comparable with some areas of Florida such as Miami which is currently suffering in the US mortgage crisis.

Having said that, it is also thought that the potential for loan defaults in Dubai is far lower, with an estimated 85% of purchases being paid for in cash, leaving only 15% heavily financed, unlike the US. Theoretically, should there be a drastic downturn in value, purchasers who had paid minimal deposits could simply walk away, defaulting on the loans. Also to be taken into consideration is the role played by the Dubai government and the fact that Dubai is a relatively young economy compared to Florida, and as such has the capacity to absorb extra capacity far more readily, as witnessed by the fact that Dubai bounced back from the 1999 Asian Financial Crisis in very short order.

And of course, if they run out of beach front, they can just build some more – no US developer would be crazy enough to try that in the Hurricane belt.