The International Monetary Fund (IMF) has warned Dubai authorities that another real estate bubble may be in the making, if the government does not intervene to slow the dramatic increase in property values.
In the aftermath of the 2008 global financial meltdown, the Dubai property market crashed (as did many other markets) and property prices plummeted to less than half of their peak values between 2009 and 2010. The downfall of the real estate market triggered a corporate debt crisis and brought Dubai to the verge of default.
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 ambitious real estate projects. These projects mainly involve the development of luxury housing, shopping malls and amusement parks. Market estimates point out that a total financing of about USD 180 billion would be required to complete all of the proposed projects.
Many of Dubai’s government-linked enterprises (GREs) are still burdened with huge sums of debt from the last 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 of 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.
The IMF has warned that if property prices continue to soar, the Dubai government may need to intervene to prevent another real estate bubble from bursting. Government authorities are in the process of revising mortgage rules by introducing caps on home lending. Although the Dubai success story revolves around promoting an investor-friendly climate with low taxes, the IMF has hinted that state authorities may wish to consider a fee on real estate market activity.
However, a final decision in this regard would require close coordination with all stakeholders to ensure that Dubai’s competitiveness is not adversely affected.