IMF warns on Dubai real estate bubble
Abu Dhabi, January 30, 2014
If the various mega projects announced by Dubai are not implemented prudently, they could result in a real estate bubble, the International Monetary Fund (IMF) has warned. The projects could also create additional financial risks for Dubai, it said.
In a review of the UAE economy, the IMF said the eonomic growth is expected to remain strong, driven by the ongoing momentum in the non-oil sectors.
The economy is estimated to have grown by 4.5 per cent in 2013, supported by tourism, hospitality and real estate. The real estate sector in particular has seen a steep recovery, with prices in the Dubai residential real estate market having increased rapidly in selected areas, the IMF said in a statement after a visit to the country by a mission led by Harald Finger.
"We expect real GDP growth to remain firm at 4.5 per cent this year," it said.
Further growth in oil production could be limited in the context of an amply supplied global oil market. Inflation is expected to increase moderately, driven by rising rents, it said.
The IMF mission, which was in the UAE during January 22-30 to review macroeconomic and financial sector developments, met with Sultan Bin Nasser Al Suwaidi, Governor of the Central Bank; Younis Haji Alkhoori, Undersecretary, Ministry of Finance; other senior government officials, and representatives from the business and financial community.
“Looking ahead, growth in the coming years will benefit from a number of mega projects and Dubai’s successful bid for the Expo 2020. The total cost, pace of execution, and financing of the new mega projects remain uncertain. If not implemented prudently, these projects could exacerbate the risk of a real estate bubble. Moreover, these projects may create additional financial risks for Dubai’s government-related entities (GREs) and the banking system in light of the still considerable debt overhang from the 2009 crisis.
“Fiscal policy adequately continues to unwind the large expansion that was put in place in the wake of the 2008/9 global financial crisis. The budget execution of the federal and emirates governments for the first nine months of 2013 was broadly in line with spending plans," said the IMF statement.
The increase in Dubai’s real estate registration fees from 2 to 4 percent last October was a welcome step in addressing speculation in the real estate market, and further increases could be contemplated in case the pace of price increases does not abate sufficiently, it suggested.
"While 2014 budgets for some emirates are not yet available, we understand that the trend of consolidation is planned to continue this year," it said.
“Newly implemented regulations on loan concentration and real estate exposure for banks will help protect the soundness of the banking system, which has remained amply capitalised and liquid. The new loan concentration limits will help contain risks to banks’ balance sheets in the context of the newly planned mega projects. It will now be important to agree, as planned, on transition paths for banks that are currently not meeting the new limits. The new maximum loan-to-value ratios for mortgage lending will provide banks with a buffer against undue exposures, while also helping to limit the degree of speculation in the real estate market. Looking ahead, the Central Bank could consider further tightening these rules if price increases in the real estate market remain very large,” the statement said. - TradeArabia News Service