IMF warns on Dubai real estate bubble
Dubai, June 11, 2014
The strengthening real estate cycle in the UAE, particularly in the Dubai residential market, could attract increased -- and potentially destabilising -- speculative demand, spurring the risk of unsustainable price dynamics and an eventual correction, the International Monetary Fund (IMF) has warned.
An acceleration in implementation of the Dubai megaprojects, currently planned to be flexible and in line with projected demand, could exacerbate this risk, said a statement issued following the visit of an IMF mission the the country in May.
"Moreover, these megaprojects could create additional financial risks to Dubai’s still substantially indebted GREs: Dubai’s total government and GRE debt is estimated at $142 billion (141 percent of Dubai GDP) -- of which $34 billion in government and government-guaranteed debt -- with $92 billion falling due in 2014–19," it said.
With rent controls recently loosened, there is also a risk that rising real estate prices will feed more strongly into inflation, the statement warned.
The report recommended further increase in real estate fees and other steps a control speculative real estate market.
IMF said the UAE also faced important external downside risks also. A sustained decline in oil prices, which could be triggered by deceleration of global demand or coming-on-stream of excess global supply capacity, would reduce export earnings and fiscal revenues. However, it said the UAE’s substantial foreign assets and fiscal surplus provide buffers against moderate or short-lived shocks.
But a large and prolonged fall in oil prices would reverse the accumulation of savings and ultimately result in lower fiscal spending. Renewed surges in global financial market volatility could trigger an increase in risk premiums and tighten liquidity conditions for the Dubai government and its GREs, it said.
By contrast, heightened geopolitical risks surrounding Russia and Ukraine or the Middle East could raise global energy prices and support the UAE’s external position, though a deeper deterioration could create significant disruptions in global financial and trade flows. Moreover, a permanent easing of international sanctions on Iran could benefit the UAE economy in light of the potential resumption of closer economic and financial linkages, it said.
The IMF mission visited the UAE from April 23 to May 8, 2014.
The report said the country's economic recovery has been solid, supported by tourism, hospitality, and a rebounding real estate sector. While growth in oil production moderated in 2013, ongoing public projects in Abu Dhabi and buoyant growth in Dubai’s services sectors continued to underpin growth. Overall economic growth is estimated to have reached 5 per cent in 2013, it said.
it said the macroeconomic outlook is positive and the economic growth is expected to remain strong at about 4¾ percent in 2014 and 4½ percent in coming years. Growth will likely be driven by the non-hydrocarbon economy, which is expected to grow at around 5½ percent this year and beyond, supported by an improving global economic environment and strengthening domestic confidence associated with a rebounding real estate market, recently announced megaprojects, and the Expo 2020.
By contrast, growth in hydrocarbon production will likely be limited in the context of an amply supplied global oil market.
Inflation is expected to further increase, driven by higher rents. The current account is set to further decrease reflecting a projected moderate decline in hydrocarbon prices and continued import growth, the report said.
The report said a continued focus on addressing potential risks stemming from the real estate market is important. The situation in the real estate market is different from 2008 in that price increases partly still reflect a recovery from the post-crisis trough and demand today is significantly less bank-financed. Nonetheless, by some measures, nominal residential real estate prices in Dubai have already reached their 2008 peak levels. The fast pace of price increases could trigger an intensification of potentially destabilizing speculative demand and thus warrants close monitoring, it said.
"The increase in Dubai’s real estate registration fee from 2 to 4 percent last October, along with regulatory measures to assure orderly market conditions for new real estate development, was a welcome step. Imposing additional fees and restrictions on reselling off-plan properties, as currently under consideration, would further discourage speculative demand. In addition, setting higher fees for reselling properties within a relatively short time would be useful," the report said.
"International experience shows that countries faced with real estate booms often repeatedly raised real estate fees and differentiated them by criteria such as the buyer’s residency, use of the property for occupancy or investment, or the time elapsed before reselling, with rates reaching up to around 30 percent for selected types of properties resold within a year, it said. - TradeArabia News Service