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New bubble build-up over Dubai

dubai by night|By K Raveendran| The Dubai real estate scene today has several similarities with the pre-crisis situation of 2008, which ultimately led to the emirate’s property bubble. Conflicting signals, including a series of big ticket announcements, entry of new developers and growing concern about overheating in the market, are making it a thoroughly confusing proposition.

The announcement of the Mall of the World, a domed, climate-controlled city more than twice the size of Monaco with 100 hotels and 20,000 additional rooms as part of an ambitious plan to grow tourism numbers, has once again brought global focus to Dubai. The project includes the world’s largest retail centre and a massive wellness district designed to capitalize on surging spending on medical tourism.

The Mall of the World, being developed by the Dubai Holding investment group, would be more than three times the size of Walt Disney World’s Epcot and Magic Kingdom theme parks combined. It would sit under a glass dome that would be opened during the winter months and would include both the world’s largest indoor theme park, a cultural centre modelled after New York’s Broadway, Barcelona’s La Rambla and London’s Oxford Street, apart from an 8 million-square-foot retail centre that would be the world’s largest, almost double the size of Minnesota’s Mall of America.

A number of other projects have also been announced in what appears to be an orchestrated move to consolidate the emirate’s recovery mode. Nakheel, which had scaled back its Palm Deira project in the wake of the property crash and financial crisis, has since revived the project as Deira Islands, comprising four linked islands which will include resorts, apartments and shops as well as 40km of coastline. Nine new beaches are to be developed off Deira coast.

Nakheel has floated construction tenders for the first phase of the mega project, under which coastal improvements would be made to 21 kilometres of beaches, including new breakwaters and quay walls and some land reclamation. A part of the project was originally envisaged to be the largest of Nakheel’s three vast man-made palm-shaped islands. Similarly, a number of private property developers, including Danube, have entered the fray with new projects.

It is considered more than coincidence that the 2008 crisis had timed with similar project announcements.  A AED 350 billion project, including the world’s tallest tower by government owned Meraas Development at the Cityscape show, had created quite a sensation at a time when the whole world was grappling with a deepening credit crisis. The project, which promised to be extraordinary in terms of architecture, was to include three buildings by Adrian Smith and Gordon Gill, the Chicago architects who were the masterminds behind the Burj Khalifa.

The Mall of the World project has already stoked fears about the way Dubai’s affairs are headed and the analysts have been wary about its prospects for the emirate and the management of its finances. Bank of America Merrill Lynch was the first to voice concern.

Merrill Lynch analysts made no disguise of their fear that the project amounted to over-reaching. “We worry about potential policymaking complacency and that such ambitious projects could lead to another boom-bust real estate cycle, particularly as there has not yet been major deleveraging in the economy,” said Jean-Michel Saliba, who anchored a report on the subject.

The fact that the announcement almost coincided with reports of Limitless, another Dubai government entity, asking for more time to repay a $1.2 billion debt, did not go down well with the analysts. Although this was somewhat offset by the settlement of $25 billion worth of debt by Dubai World, further clarifications on the deal showed there were still a few underlying issues to be tackled.

The Merrill Lynch views came within days of the UAE Central Bank warning about the building up of vulnerabilities in the property market. Low residential rental yields in Dubai and Abu Dhabi may indicate growing imbalances and overheating in the real estate sector, the central bank warned in its annual financial stability report.

“Current average rental yields in Dubai and Abu Dhabi are approximately 70 and 130 basis points below historical averages, which could indicate growing imbalances – (an) overheating real estate market,” the central bank said.

“Monitoring developments in the UAE real estate markets and the banks’ exposure to it remains a core financial stability priority,” it added.

The Central Bank as well as Dubai Land Department authorities have been talking about initiatives to prevent another property bubble. As part of the move, new restrictions were imposed on property mortgages while the Land Department doubled its fees on property transactions to four per cent to curb flipping so as to discourage speculation.

But agencies like the IMF have been warning that these measures were not sufficient to contain the problem. IMF said Dubai may need stronger measures to counter property speculation in the emirate and a senior Fund official said a potential real estate bubble has not been ruled out.

With Dubai’s economic growth set to hover around 4.5 percent in the coming years, the fast-paced recovery of the real estate sector creates the risk of “unsustainable price dynamics and an eventual, potentially disruptive correction,” IMF said.

The value of real estate transactions in Dubai jumped 53 percent last year, to more than AED 236 billion. Selling prices for residential property rose by about a third in the first three months of 2014 compared with a year before, prompting the IMF to warn of a possible bubble.

Aside from the real estate sector and despite a buoyant economic outlook, most of the uneasiness involves Dubai’s government-related entities and their ability to repay their debts on time. Property developer Nakheel recently said it would repay all its debt ahead of maturity but others linger in uncertainty.