Dubai bond market shows resilience – IMF cautious

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Dubai’s Islamic bond gains squash concerns that another real estate bubble may be forming.

Dubai real estate
The Dubai real estate market is showing strong performance, but debt levels remain high, prompting a caution from the IMF. Image courtesy: Olaf Dziallas

The Emirate’s real estate sector continues to perform strongly, but the IMF is warning the government to be ready for a timely intervention. In the aftermath of the global financial meltdown, the Dubai property market crashed and property prices plummeted to less than half their 2009 and 2010 peak values. The downfall of the real estate market triggered a corporate debt crisis and brought Dubai to the verge of default.

DUBAI BOND MARKET

Market analysts believe that while concerns may be valid, the risks are already factored into the bond prices. In July, Dubai’s sukuk yield fell from 6.45 percent to 5.19 percent, the highest drop in the past 13 months. Further, Dubai’s credit default swaps have also declined 105 basis points in the past 12 months to 220 in early August. In comparison, the MENA contracts recorded an average 17 basis-point decline to 290.

PROPERTY VALUES

Compared to last year, property prices in the Emirate have climbed by almost 35 percent. During the past three quarters, major Dubai property developers have announced the launch of many ambitious real estate projects. Although Dubai’s success story revolves around promoting an investor-friendly climate combined with low taxes, the IMF has hinted that state authorities may wish to consider a fee on real estate market activity.

IMF URGES CAUTION ON DEBT

However, the government needs to scrutinize and monitor such massive real estate development projects. Many of Dubai’s government-linked enterprises (GREs) are still burdened with huge sums of debt left over from the previous crisis. According to IMF figures, the total debt of the Dubai government and its GREs has swelled to USD 142 billion by the end of April 2013. This debt now amounts to 102 per cent of the gross domestic product of Dubai and the UAE’s small northern Emirates. It is estimated that USD 64 billion of the debt held by Dubai and GREs will become due between 2014 and 2016.

Some developers, such as Nakheel, are ‘hedging their bets’ by lengthening the repayment terms for their debt now, while the real estate market is on sound footing.

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