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Could Dubai property meet its nemesis in 2024?

Global macro forces suggest an overheated real estate sector, reminiscent of 2008's tipping points

Dubai property villas Pexels/Abid Bin Nazar
Prices for villas in Dubai have doubled, if not more, but global market signs suggest a correction may be on the horizon

There have been five distinct property market cycles of growth and crash in Dubai since its opening in 2002, influenced by global macro factors and the vagaries of geopolitical risk. 

The market opening to non-UAE citizens occurred in the aftermath of 9/11 and the US invasion of Afghanistan, which generated a tsunami of Arab capital repatriation from Wall Street and Europe back to the Gulf.

Dubai’s real estate market was a natural magnet for regional capital flows triggered by a quantum increase in geopolitical risks.

Global macro forces created the ideal bull case for Dubai property.

The Federal Reserve under Ben Bernanke slashed interest rates to help revive the moribund post-9/11 US economy and the Bush White House’s multiple tax cuts led to a plunge in interest rates and the US dollar.

The UAE dirham’s peg against the greenback meant that Dubai real estate became hugely attractive to buyers in Britain and the EU.

The four-fold rise in Dubai home values between 2002 and 2008 also coincided with an epic rise in Brent crude oil prices from $15 on the eve of Bush’s 2003 invasion of Iraq to $148 at the height of the Wall Street credit bubble in July 2008.

Global capital flows ignited the Dubai property bull market but also contributed to its 50-60 percent crash in 2009.

The catalyst was the failure of Lehman Brothers in September 2008 that triggered a crisis of confidence in the global credit markets at precisely the moment that UAE commercial banks had increased their net borrowings 10-fold in London’s wholesale funding market. 

Real estate and construction loans accounted for one-third of UAE bank loan books on the eve of Lehman’s death rattle.

This prompted the UAE central bank to impose strict limits on commercial bank exposure to property lending and compelled the largest systemic banks to reduce balance sheet leverage.

The Dubai government also did its best to end the Wild West milieu in the property market with the creation of the Real Estate Regulatory Agency, imposed licensing and net capital rules for brokers and escrow accounts to ensure that developers did not pyramid customer funds that were meant to finance construction in specific projects.

After the debacle of property giant Nakheel’s standstill agreement in 2009, the restructuring of Dubai World’s $25 billion debt to its global creditors restored investor confidence in the emirate.

As home prices in Dubai had fallen far more than rents in 2009 to 2012, the emirate once again offered some of the highest rental yields in the world and modest home affordability metrics.

A black swan geopolitical event triggered a 40 percent rise in home prices from 2012 to 2014. The Arab Spring caused billions of dollars to flee to the political safe haven of a Dubai property market that was now mature, regulated, high yield and undervalued with normal risk premia.

Yet the second bull market in Dubai was torpedoed in the 2014 to 2016 oil price crash engineered by Saudi Arabia’s desire to punish its Texan shale oil rivals in a price war that led Brent to plunge from $115 in June 2014 to $28 in February 2016.

This epic fall in oil prices coincided with a 30 percent rise in the US Dollar Index. These two macro tempests led to a 50 percent crash in Dubai property prices between 2014 and the onset of the pandemic in early 2020.

A new bull market

Paradoxically, the pandemic and the Ukraine war spawned the latest bull market frenzy in Dubai. Luxury villa prices have doubled, or even tripled, as low inventory and an influx of foreign cash triggered a demand shock. 

In 2022-23, more $10 million luxury property deals were transacted in Dubai than New York, London and Hong Kong.

The bull cycle has now broadened to include apartments – 80 percent of the emirate’s housing stock and prices have risen 20 percent in 2023.

The speculative froth in the market can be gauged by the fact that 60 percent of all property transactions are off-plan deals and home affordability metrics have now hit the stratosphere.

The long line of buyers hoping to book a villa on the twice-resurrected Palm Jebel Ali at prices 10 times above the original offer price screams déjà vu for anyone who witnessed the manic buying peak in 2007.

Yet malign macro forces have begun to gut luxury property prices from London to Singapore. The Fed is in tight money mode now despite the most draconian interest rate shock since the early 1980s. The US dollar index has risen an ominous 8 percent since July.

Europe is mired in a recession, a property slump and a credit crunch. China’s property crash is in a $5 trillion black hole and contagion has spread to its opaque shadow banking system. US bank lending to commercial real estate has contracted even as delinquencies on subprime auto loans and credit cards begin to spike.

The ghosts of 2008 have stirred in the netherworld of global finance. Does a macro nemesis await Dubai in 2024?

Matein Khalid is the chief investment officer in the private office of Abdulla Saeed Al Naboodah and the CEO designate of a venture capital firm

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