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Expo bid success to have fallout in real estate market

dubai3With the D-day approaching fast for the award of the 2020 Expo, everyone in Dubai is excited about a most likely successful Dubai bid. Amidst all the fanfare, however, there is a lurking fear about the impact of a successful bid on the emirate’s real estate sector.

Those who do worry have one overriding concern: that Expo fever will tip an already overheating property market into bubble territory. Real estate values in Dubai halved in many areas in the wake of the financial crisis less than five years ago, but have gone up again at a surprising rate this year. Apartment prices were up by about 38% year-on-year last month, according to a recent Standard Chartered research report. Most analysts cite a recovery in Dubai’s fundamentals of trade and tourism.

While many local analysts won’t come out and say Expo-related speculation is bad for the market, plenty voice their concerns in private. The Dubai government recently raised property registration fees to curb speculative activity, and proposed central bank rules that cap mortgage lending and aim to reduce the amount of leverage in the market. Rumblings have intensified recently that price rises can’t continue at the rate of the past year. Property consultancy Jones Lang LaSalle, which has signed on as an official supporter of the 2020 bid, said in a report last month that the rate of increase “is indeed unsustainable”, and that slower growth “would be far more beneficial for the overall market”.

It’s hard to tell exactly what the reaction will be if Dubai wins the bid, which would be followed by the construction of additional housing and hotels, as well as the Expo centre and an extension of the city’s metro line. Some analysts don’t expect a huge effect, arguing that Dubai is a leading candidate and its success has already been priced into equity markets, if not property markets.

Other analyses have framed the Expo as something beneficial to Dubai’s economy in the long run, but costly in the medium term. While it could boost gross domestic product by 3.5% annually between 2015 and 2021, Bank of America Merrill Lynch economist Jean-Michel Saliba said in a recent report that it puts strains on the government’s budget at a time when it is trying to rein in debt and reduce deficits.

The $6.8 billion of anticipated spending on the Expo site and transportation networks would double current government capital expenditures, the report says. The Expo could require more borrowing for an emirate that, along with its government-owned companies, had $142 billion of debt as of the end of April, or 102% of GDP, according to an International Monetary Fund report in July.

Putting on the six-month-long event itself is to cost another $1.7 billion, which the government plans to cover with factors such as ticket sales and sponsorships. Much of the overall cost, however, might have to be borne by the private sector.

Dubai will have to more than double its hotel capacity to handle 25 million visitors, according to an EFG-Hermes report, requiring about $7.2 billion in new investment. A surge of visitors that big could also tax Dubai’s airports, despite their large size.

The details of Dubai’s bid are still in a vague state – the promotional materials drone on hopefully about “sustainability,” “opportunity” and “mobility”, but offer few specifics. We’ll have more clarity both on the nature of the plans and the effect on Dubai’s markets if it wins the vote.-WSJ