Credit crunch may slow down realty sector

With a liquidity crunch in the real estate market slowly surfacing in Dubai, developers are not sure if this will affect the lending scenario in Dubai. However, developers hastened to say currently the real estate market here is stabilising.

A cross-section of realty players, whom Emirates Business contacted, said the tightening liquidity is a cause for concern.

"Should mortgage rates and liquidity from mortgage lenders in Dubai be affected owing to the global negative scenario, this could have a direct impact in slowing sales in Dubai's real estate sector," said Abid Junaid, Executive Director of ETA Star Properties. "These are trying times and challenging for everybody. The impact that we see comes from the current domestic growth. The tightening of liquidity that we see internationally is not as much here. Also, apart from large local consumption, corporates are diversifying investments into international markets. However, we understand the Central Bank will restore that," said Wasim Saifi, Chief Executive of Tamweel.

"Interest rates are up and cost of funds will also go up and that will be passed on to the end-user. But as inflation rates are currently at a high in the region, people are borrowing at negative cost of funds in comparison to inflationary rates," said Saifi.

"The property market will do well. We might see slowing down of sales but it is that time of the year when there is less activity. However, Cityscape will pump up the sentiment in the property market," he said.

"Tightening of further liquidity in the market owing to the recent stock market crash and rising dollar value will slow down property sales," said Junaid.

ETA Star Properties does not, however, in the near-term forecast a lowering of property price, considering the high construction costs and land values.

"The developer margins are not high in today's market so we don't see a question of lowering prices," said Junaid. "As a developer, we will look at taking different measures as and when the realty market unravels and progresses," he added.

Real estate analyst Robert McKinnon, Managing Director – Equity Research of Al Mal Capital said a price decline will not be alarming considering there was sufficient liquidity in the market . However, he maintained there was a precipitating risk involved in the realty sector considering borrowing costs are going up with increasing mortgage interest rates.

Marios Maratheftis, Regional Head of Research at Standard Chartered said: "The largest of economies have declined, so it is hard to think we can't see an impact."

And according to Sana Kapadia, Associate-Equity Research, EFG-Hermes, the extent of impact on the realty market in Dubai will depend on where the buyer interest is coming from.

"If the buyer is gravely affected by Lehman's bankruptcy, then it will affect his investments here, as well," said Kapadia.

"Whenever US coughs everybody gets sick, but bear in mind this is only a cycle. This does not mean the US will collapse. Investors in Dubai who have been involved with large international institutions such as Lehman, which collapsed, will definitely feel the impact here. But we are the most shielded in Dubai in comparison to the rest of the world. Whatever happens in the US it will have the weakest impact here in the UAE," said Richard Lee, Vice-President of Sungwon Corporation, a Korean-based development and construction firm in Dubai. "Prices will be adjusted to a certain extent but it will merely be an off-shoot to what has been happening in the international market," said Lee.

Sungwon Corporation currently has $800 million (Dh2,940m) worth of projects across Business Bay, Sama Dubai's The Lagoons and Culture Village. The developer is looking for more development opportunities, however, in a cautious manner. "Culture Village was launched last October at Cityscape and in a span of one year we have seen price escalations to 40 per cent."

Real estate analysts further said the recent stock market crash in the UAE did not see liquidity from the stock market to pour into the real estate sector.

"That is not happening and the stock market funds are being repatriated to other countries. It is not coming into the realty sector," said McKinnon.

"The withdrawal of large foreign institutional funds are from non-GCC markets and they are not going to put that back into the realty sector in the UAE," said Lee.

Developers such as ETA Star Properties said it is not planning any strategy changes with respect to its investments into Dubai.

"Ours was from the beginning a well thought-out strategy, and not something where we over committed into this market. We are planning to launch projects towards the year-end and as far as we are concerned we are on track for launching our projects in Cityscape," said Junaid.

Abu Dhabi Commercial Bank's Senior Vice-President and Head of Retail Assets, Sundar Parthasarthy said: "I cannot see how the property market could be affected adversely as there has been a downturn in the US and the UK for a while and all we can see is this market has been enjoying good liquidity. Globally there has been an apprehension for a while, yet Dubai has continued to enjoy high liquidity.

"The biggest concern today would be irrational property prices currently existing in the Dubai realty market such as the premium properties that are exorbitantly priced.

"For instance, at Downtown Burj Dubai there are properties selling for Dh2,000 a sqft and others selling for Dh5,000 per sqft. Such huge variances in one particular master-development will be levelled. Properties that fall in the segment of Dh1,000 to Dh1,500 a sqft will see a sustained interest, even with declining positive sentiments in the market."

"People have been prudent in the information they are collecting on the realty sector. What Dubai actually needs is clarity in the laws that are coming into fray. Investors have in the recent past been shying away as a result of a lack in clarity on the law," said Parthasarthy.