It was all fascinating stuff at the UAE Global Investment Forum, organised by Institutional Investor, in Abu Dhabi yesterday. High-calibre speakers, spot-on subjects for discussion, and intriguing panel sessions. One of these was the event on real estate, and how the world can capitalise on the rapid growth of the UAE market.
Focusing on the dynamism of the property market, this session posed the ultimate question: could the bubble burst? The answer was no, not unless there is cataclysmic coincidence of geo-strategic disasters that are beyond the ability of businessmen or governments to anticipate. The growth is too sustained, and backed by real asset values, rising incomes and genuine demand, to falter in all but the most apocalyptic of circumstances. That seems a valid judgement to me. UAE property values are not in the sub-prime categories, and mortgages are subject to much more stringent quality checking than in most parts of the world. The very idea of a “ninja” mortgage – lending money to somebody with no income and no job – is alien to UAE banking culture.
But the more interesting practical question that followed from this concerned the matter of the UAE Government’s willingness and ability to influence the direction of the property market. In particular, the panel was asked, is there a government safety net to rescue developers and investors in the situation of a market recession?
That, as the panel recognised, is a tricky question. Many investors see how important the property sector is to the future of Abu Dhabi and Dubai. The five largest developers in the UAE are all well plugged in to the business power structures. The rapid growth in both cities has been largely fuelled by the income stream from property development. Investors see how closely interwoven the property industry is with the senior echelons of the business establishment, and many conclude there would be an immediate bail-out of any significant property business that happened to find itself in trouble.
Investors who fall for that line are deluding themselves, the panel said. The truth is that the government would be extremely reluctant to come to the rescue of a troubled developer in the UAE. The prevailing entrepreneurial culture would preclude such blatant bail-outs, if only on the grounds that to allow one to go to the wall would serve as an example to the others. Expect no Northern Rock scenarios in the UAE.
This puts into perspective talk of a “halo” effect that some of the credit rating agencies have been suggesting recently – the idea that there is a protective government shield around large parts of UAE business.
The government, of course, does have a significant, even critical influence, on the way business develops, especially the crucial property business. It can ensure there is a benign regulatory environment for the property sector, and enact policies designed to ensure a free market.
It can also facilitate the best financial environment for the property business to flourish, encouraging the appropriate policy on mortgage credit availability, and on the demands of foreign investors. In particular, the forum panel thought the government could do more to accelerate the development of the relatively immature mortgage industry.
And, critically, the government can balance supply and demand in the property market by ensuring that completions and deliveries never outstrip investors’ need for new housing and commercial stock.
But if any rosy-eyed investors are sinking their money into UAE property in the expectation the government will be the lender of last resort, forget it.
UAE property is out on its own