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Dubai property market improves, but risks remain

on Nov 1, 2012

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Dubai's improving property market is in line with a wider economic recovery in the emirate, boosted by stronger visitor numbers and a recovery in its retail markets, according to a new report from Citi.

The bank said that although the debt overhang incurred during the boom period remained a drag on growth, stronger trade with global partners and regional growth spurred by higher oil prices have helped to boost the emirate's economy.

It has also experienced a "misfortune dividend" from the Arab Spring, where capital and commerce has switched from countries where disturbances took place into perceived safe havens.

Citi's chief economist Farouk Sousa quoted figures from Cluttons which showed that mid-range properties have increased in value by 20% over the last year.

"This is below the 30%-40% annual gain in property prices during the pre-2009 boom but, according to CBRE, represents one of the sharpest gains in the property sector anywhere globally this year," he said.

The improvement in values is helping property companies and other investors in the real estate markets to repair balance sheets which were weighed down by too much debt, according to Citi, and should lessen risks over refinancing loans.

"However, we caution 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," said Sousa.

He pointed out that the recovery has been experienced mainly at prime locations, but that there was still an overhang of supply in both residential and commercial markets. The commercial market experienced a greater degree of oversupply as a result of the boom, and vacancy rates for office space are estimated to be as high as 40%.

"Our own estimates suggest that the current stock of housing exceeds demand by some 50,000 units (15% of total supply)," he said.

"While we accept these are rough estimates and honing in on accurate supply/demand figures in Dubai is notoriously difficult, a drive around some of the in-land developments around the Al Khail and Emirates roads seemingly confirms the notion that supply does not appear to be particularly tight."

Citi said there were also risks relating to ongoing uncertainty in the wider global economy.