Citi says threat of Dubai bubble repeat remains

|By TAP Staff| A new Citibank report on Dubai property market asserts there is little room of investors to show complacency as the measures to curb speculative demand and to strengthen the prudential regulation of the real estate and banking sectors so far do not remove the threat of a repeat of property-led volatility of 2008-09.

As Dubai’s property market booms and large-scale projects are announced, parallels are emerging with the property bubble that affected the emirate six years ago. Citibank has  for some time been highlighting its concerns regarding the sustainability of asset price inflation, but the new report focuses on the key question of whether this is leading to the kind of economic and financial volatility that Dubai experienced in 2008/2009.

Citi researchers say Dubai is experiencing a sound and balanced cyclical economic upswing. But as a small open economy, Dubai remains exposed to exogenous shocks, such as the impact of EM tapering or a potential hard landing in China, and that these could have a significant impact on domestic assets prices. At the same time, they stress that Dubai is much more resilient to such shocks than it was at the height of the previous cycle in mid-2008.

They attribute this to a more sound and liquid banking system, progress on deleveraging debt and the moderation in construction activities. In contrast to mid- 2008, bank liquidity is less vulnerable to exogenous shocks and is likely to remain supportive of local asset markets. Similarly, Dubai has made progress on deleveraging and smoothing debt maturities. Refinancing risk among some of Dubai’s most significant Government Related Entities (GREs) has been significantly reduced. Also,  rising property prices have not, to date, led to a significant rise in construction and leverage.

Despite the differences, the report also recognizes that Dubai’s is a dynamic and fast changing economic landscape. Signs may emerge that construction activity is responding to potential speculative demand in the real estate market, and that this is leading to oversupply issues and rising corporate sector leverage. “In such circumstances, we believe vulnerability to exogenous shocks is likely to creep back into Dubai’s economy”.

It points out that the authorities are aware of these risks and have responded with a number of measures to curb speculative demand and to strengthen the prudential regulation of the real estate and banking sectors. But whether these measures are sufficient to prevent a repeat of the property-led volatility of 2008/2009 remains to be seen.