United Arab Emirates: 21/06/2006

Arab liquidity underpins Dubai real estate

Central London house prices have surged in 2006 while the rest of the UK property market is stagnant or falling. Some of the $300 billion-a-year in oil revenues earned by the Middle East is apparently finding its way back into Arab buying of property in Knightsbridge and Belgravia. This money is also supporting the Dubai boom.

Talk to a Central London estate agent these days and they will all tell you the same story: Russian property buyers get the headlines but Arab buyers are the real force behind a surge in property prices this year in the UK capital's prime locations.

It is not the same story in the rest of the country: prices in southern England are weakening with asking prices down around five per cent on a year ago. Higher interest rates, energy prices and excessive house price growth have taken their toll in the UK.

The same market dynamics are at work in the Dubai real estate market. Buying by foreign nationals, and particularly GCC nationals from Saudi Arabia and Kuwait, has been a major factor in explaining the continuation of the real estate boom.

High rental yields

Negative real interest rates have also worked very much in favor of promoting real estate investment activity. And high rental prices still give Dubai among the top rental yields in the world. It has been a paradise for investors so far.

However, as with all property booms the best deals were probably struck in the early days, and as time has gone on the risk-to-return ratio has changed. But with the population of Dubai continuing to grow explosively, supply is not yet an issue despite all the construction underway.

What could derail this boom? Skeptics who see cranes hanging over a city when they step off an aircraft always reckon that a big bust is brewing. But is it different this time?

Unless oil prices fall suddenly then the glorious current economics of the Middle East - with probably the highest domestic investment levels in the world supported by huge liquidity and equity - will continue. Moreover, commodity experts increasingly agree that the oil price is sustainable at much higher levels into the future.

Global catastrophe

Only a big crash in global financial markets followed by a worldwide recession and low oil prices could upset this very bright economic outlook. The past month has seen global capital markets wobble worryingly but the GDP growth dynamic of the US remains very strong, and predictions about impending gloom have been wrong many times so far this century.

One possible scenario for Dubai property is not the big bust that the skeptics predict. Instead investor money starts to flow to alternative markets, like Abu Dhabi and Doha, and Dubai takes a breather while the market absorbs the strong supply flow of new build over the next five years.

Surely a halfway house between extreme pessimism and optimism about the Dubai property market is the most likely result, and that would still make buying rather than renting the best option for long-term residents, and support most of the developers.