| Is property investment in Dubai still viable?
According to the International Monetary Fund, the total debt of Dubai and its government related entities (GREs) stands at $109 billion, or around 125% of its GDP – comparable to the 150% debt-to-GDP ratio of Greece. However, I estimate that 30% of the population is labor, living in combined accommodations or low-income housing. 1, there is an oversupply of 70,000 units in middle to high-income units. However, the image of an excellent happening lifestyle and world class infrastructure combined with good law and order, aided by the spillover from Abu Dhabi's development, may still enable a recovery for Dubai. Its pace, however, will be far more mellowed; as limited government revenue collection and spending is unlikely to drive growth. I would recommend playing safe, and buy at a maximum 25% above estimated construction and reasonable land costs for a unit; whether villas or apartments. This will limit downside in case a future debt crises stalls confidence again. UBS estimates put Dubai housing stock at 360,000 for 2011. Thus, taking the official average household size of 5. Real estate and construction (22%), trading (31%), financial services (11%) form the major part of its annual output. In contrast, Dubai produces only 2 per cent, but accounts for 40% of country GDP. Unit prices doubled between the first quarter of 2007 and the third quarter of 2008 alone, according to the Collier's index, before halving from the peak. I believe that this glut may be covered in the coming years as new projects have been cancelled. With that in mind, let's look at real estate prices. The key question is whether it can make these sales fast enough to pay off debt maturities. Similarly, for Dubai as an entire, the assets of GREs are certainly greater than the overall debt in my opinion, primarily on account of large differentials in land cost and market values. When real estate prices crashed, developers suffered because the the necessity of the unsold stock fell and payments dried up on under-construction projects. Even though Abu Dhabi should and most likely will help in meeting Dubai's financial commitments over the medium-term due to latter's immense importance to the economy, what it is unlikely to tolerate is another round of debt fuelled growth as it will result in a creation of the moral hazard problem common to insurance. Let us judge Dubai's importance here. Any fancy finishing reflected in prices need to be avoided. . The bottom line is that investors should focus on the balance sheet of Dubai. There are two things to note here. These non-oil sectors have helped its GDP grow by 13% per annum between 1995 and 2011. Dubai is expected to generate $8. Secondly, the current outstanding debt is 13 times annual government revenue. Firstly, revenue is a mere 10% of GDP as a result of no direct income taxes: oil and gas contribute 11% of revenue, customs duty 22% and 60% comes from administrative fees. |
Tuesday 13 March 2012
Is property investment in Dubai still viable?
