Dubai’s Bubble Economic Growth — Will It Burst?

JEDDAH, 25 June 2007 — The expanding bubble that is Dubai’s property market has to burst soon. So runs a commonly held belief among the more cautious investors evaluating the possible profits against the risk of collapse in the Dubai property market.

The answer, according to Stephen O’Brien of MINC Property Enterprises is that the property scene in this busy emirate is, to coin a phrase, “a game of two halves.” In other words, yes and no — neither of which answer is in this case mutually contradictory.

“There is a lot of concern in the market over this,” he said during a visit to Jeddah last week, “but I believe we have to look at what is driving the market.” He thought there would be a correction and the correction would be from a price point. “I do not believe it will be an oversupply of product.”

Prices in the current cycle of the property sales market were unachievable and unsustainable. The symptom of this was in part the proliferation of gimmick selling — free cars and holidays for example — that accompanied many of the sales drives.

O’Brien’s perspective on the eventual deflation of the Dubai bubble came from the area of the market which MNC is currently focused on.

“We sell our products in the entry level market and we allow for the follow on — second in line — investor to make a profit as well. We don’t have pricing loaded up to supply the gimmicks that so often are attached to property,” he said. Those he opined were paid for by the inflated prices of the properties. That higher price made the resale of the property more difficult for the investor and turned the investment procedure into a game of ‘pass-the-parcel.’ The final buyer gets holding the overpriced and potentially unsalable property with the hiss of a deflating bubble filling his ears.

The fundamentals that drive the market are, he said: The 11 percent per annum growth in the Dubai economy and the influx of white collar workers to power the expansion. They will need accommodation.

In February, Sheikh Mohammed Zayed said that for the next eight years Dubai would follow a strategic plan based on billions of dollars of capital infrastructure and works to drive the services sector and reduce the emirate’s reliance on oil still further.

“That growth will be in the region of 11.4 percent over that time — and is underwritten by the government,” O’Brien said. There has been a paradigm shift to transport, building Dubai as a financial hub, hotel and tourism, hospitality.”

Supply and demand will continue to drive the market because of the influx of workers. The vision of Dubai continues — and Dev Makh, global head of marketing for MINC, thought that as long as the projects were well and conservatively priced growth would continue and the developers involved in that would continue to grow with it.

“Those already are the developers that have a successful track record in the market. When there is a slowdown, those with a track record will survive because track record will be a deciding factor, if not the deciding factor for new investors. It will not only be the record of profitability, but of management of property for investors,” Makh said.

It appears that the principles that apply to property investment anywhere will be the ones that will underpin the long term but less glitzy property investment market in Dubai. The flimflam and spectacle will evaporate and so will its purveyors. “What will count is the location, the returns on investment and the quality of management services for the property,” he said.

Those agreed O’Brien would be the defining characteristics of the future market. Track record and word of mouth advertising would be key elements in the growth of the property market. “The customer support, letting and management that produces the small investor the profit make the package that will be around when the softening of prices does come,” he said.

There are threats to the market — but already they have been anticipated. O’Brien identified them as the lack of both government and internal market regulation.

“Everyone wants to be a developer — they see a booming market and they want in. However, many cannot sustain it and they confect a Dubai “’product’ without understanding what the market wants,” he said. There was a lot of misrepresentation in the market and there had to be a consensus between government and market together with regulatory bodies able to accredit, license and in needed, sanction property developers. “It’s really about being credible,” he concluded.

Dubai is an attractive prospect to investors, especially in the Kingdom and to the wealthier expatriate in Saudi Arabia. “There is a deal of liquid capital in the Kingdom among locals and western expats,” Makh said. “The fact that Dubai offers automatic residency visas to the property buyer makes the prospect of investment a great deal sweeter.”

Dubai is set to grow for many years. For the next eight years, at least its growth is underwritten by the government. This makes property investment, according to Makh and O’Brien, a viable and profitable exercise. Regulations on the market are in development and will, they feel, be implemented.