Dubai has bounced back from the 2009 slump by focusing on its roots, as available data point to a broad-based economic recovery based on the emirate's comparative strengths as a regional hub for commerce and trade, a report said.

 

Over the past couple of years, data have pointed to robust growth in the core economy: transport, tourism, logistics and trade. Investor confidence has returned, with Dubai-related risk assets rallying strongly, said the Citi Research report. 

 

Now the feel good factor appears to be spreading to the property sector: the volume of property transactions is on the rise, and valuations are climbing sharply, it said.

 

The report argued that Dubai’s real estate recovery is in line with the wider economic recovery, and is well supported by economic fundamentals.

 

However, it warned against early signs of exuberance, such as the re-emergence of off plan sales and the risks of excessive supply given some of the recently announced projects. Such exuberance could undermine not only the sustainability of the real estate recovery but lead to dislocations in the wider economy as well, it said.

 

For investors, the economic recovery and pick-up in the real estate market is unambiguously good news in the near-term. They signal a strengthening in cash flows to the Dubai sovereign and its Government Related Entities (GREs), most of which have a significant stake in the local economy and, specifically, the property sector, the report said.

 

The recovery should also accelerate balance sheet repair at some key conglomerates, alleviate refinancing risks, and hence support valuations on Dubai-related risk assets, it said.

 

"However, the risks we point out regarding the sustainability of the real estate recovery and possible future dislocations in the economy as a whole apply equally here, and could manifest themselves on a 2-3 year horizon, in our view," the Citi report said.

 

Having spent most of the previous 50 years establishing itself as a regional hub for trade and commerce, Dubai’s economic fortunes have become in many respects linked to the ebb and flow of regional and global trade and commerce, and remain so, the report said.

 

It is in this context, Dubai is experiencing a two-speed recovery: the real estate sector and debt overhang remain a drag on growth, but the core economy has bounced back strongly, thanks to: Recovery in the global economy and trade; Strong regional growth on the back of high oil prices; Recovery of cost competitiveness; Successful damage limitation from the bursting of the real estate bubble and debt overhang; and the misfortune dividend - Dubai  inadvertently benefitted from the unrest caused by the so-called “Arab Spring”.

 

"In an economy where 96 per cent of the workforce is made up of expatriates whose right to reside in the emirate is linked to their ongoing employment, the feedback between growth and demographics is particularly acute. Not only does a growing population indicate higher employment and thus a healthy economy, it is also reinforces economic growth as it equates, prima facie, to higher domestic demand. This relationship tends to accentuate cyclical peaks and troughs in the economy, in our view: growth is reinforced by population growth, recession is deepened by population outflows," the report said.

 

According to Citi estimates, a sharp reduction in guest workers (mainly in construction) led to an overall decline in Dubai’s population in 2009, although not in the ‘white collar’ population. Overall population growth has since recovered by around 2 per cent, but the ‘white-collar’ population grew by almost 8 per cent in 2011.

 

These population estimates provide additional evidence of Dubai’s economic recovery, as they reflect a rise in employment in the emirate. Equally importantly, they underpin a surge in domestic demand, as the growing number of expatriates represents a rapidly expanding consumer base for local business, it said. - TradeArabia News Service