S&P rings Dubai alarm bell once more

|By K Raveendran| The trigger for Dubai’s property crash of 2009 had come in the form of a Standard & Poor’s report that warned of a serious price correction in the wake of a highly unrealistic boom.

Six years later, the rating agency has issued another ominous report on Dubai’s property market, although there are not even the faintest signs of a boom present now. The warning this time is that residential property prices are likely to fall 10 to 20 percent this year because of subdued demand, slower economic activity and downbeat investor sentiment.

But S&P stresses that it would be nothing similar to the 2009 crash. “While Standard & Poor’s expects somewhat of a correction in the UAE’s residential real estate market after three years of sharp price appreciation–it should be nothing on the order that led to the Dubai crisis in 2009.” it said.

“Slightly lesser demand will come from non-residents,” S&P said in a statement. “In early 2015, non-resident demand from Russia and other member countries of the Gulf Cooperation Council was particularly subdued.”

S&P expects oil prices to remain weak through to the end of 2016 so that economic growth in the United Arab Emirates as a whole “is likely to slow markedly in 2015 and 2016”.

The agency also warned that a fall in Dubai’s stock index would be likely to affect investor views on property. The index is down 10 percent over the past 12 months, according to Reuters’ calculations.

That drop reflects doubts about the sustainability of current property prices, S&P said. “General investor sentiment is key in Dubai real estate because a large majority of buyers are investors.”

Greater supply of new residential units will also dampen prices. S&P cited forecasts from property analysts REIDIN that 20,170 new units would be delivered in 2015, nearly double the annual average of 11,600 over the preceding three years.

Prices have recovered to within about a fifth of their peak values as of January, having fallen by more than half from their 2008 highs. They have since weakened again.

Dubai’s property market crash led to a debt crisis, but now property developers, many of them state-linked, are better placed to withstand market shocks, S&P said.

S&P predicted Dubai’s developers, including Emaar Properties and DAMAC Properties, can absorb up to about a 20 percent drop in home prices because of stronger balance sheets and greater revenue diversification into more reliable income streams.

S&P estimated property developers’ debt to core earnings ratio was 1.9 on average at the end of 2014, versus 3.3 at the end of 2008.