Dubai buries its head in the sand as world waits to see if it can restructure its debts

It was a well planned announcement that unleashed the true extent of Dubai’s billions of dollars of debt, one that was executed with the knowledge that the world wouldn’t be able to find out much more in the middle of a religious holiday.

His son, the crown prince, told investors a few days before the debt announcement that Dubai’s economy was ‘humming along nicely’ and the chairman of one of Dubai’s biggest property developers claimed that the emirate would still enjoy a growth rate of 5% this year.

To put it mildly this was the kind of spin to out-spin spin, to put it crudely, they were lying.

So what happens now? Well the media is still being clamped down upon.

The Sunday Times of London was banned. Calls to government officials still go unanswered even though the Eid holiday is over.

A lot depends on when the debt is re-paid and analysts are divided over what will happen in the next six months.

An added complication is that the debts were taken out as Islamic bonds, known as sukuks, and the rules about what happens if the borrower fails to pay them back are hazy.

But some analysts are less alarmed about the effects on some sectors. Nicholas Maclean, Managing Director of CB Richard Ellis Middle East, is quietly confident that the commercial property market won’t see much of an impact.

‘I think there has been an over reaction. Certainly the news was not handled well and making an announcement at the start of a national holiday meant it was difficult to get a hold of people to find out more,’ he said.

‘We are not seeing a decline in interest in the commercial market.

Global corporates are still interested in Dubai as a place where they can set up their Middle East hub and that is not going to suddenly change,’ he explained.

He is also less worried about the impact on the residential property market.

‘There may be a short term effect on Nakheel properties but this shouldn’t affect other property developers and the market as a whole. I find the international reaction very surprising,’ he added.
Although the immediate fears are calming as Dubai World seeks to restructure, it is what happens if it cannot pay its debts in six months time that is bothering others.

‘Should they effectively default, it could become one of the biggest sovereign defaults since the Argentinean crisis,’ said Marina Akopian, partner at HEXAM Capital, which manages about $440 million in emerging markets.

‘It will certainly have a very negative impact on the Dubai property market and I suspect on property markets globally,’ he added.

Even the restructuring of Dubai World and its subsidiaries is expected to undermine confidence in the property market.

In recent months prices have shown signs of stabilization and even modest recovery with property consultancy Colliers International reporting the first increase in prices for residential property since the market started plummeting late last year.
According to many it is master developer Nakheel that lies at the heart of Dubai World’s problems.

The developer borrowed billions to build grandiose projects such as Palm Islands.

Earlier this month investment bank UBS said Dubai property prices could drop a further 30% over the next 18 months and may take at least 10 years to recover to peak levels.

One of the bank’s analysts Saud Masud said it is unlikely to change its estimate for the drop in prices and in fact the further fall may happen sooner than anticipated.

‘This type of crisis brings fundamental weaknesses to the surface faster. This could play out in the next six months or so,’ he explained.

One of the biggest concerns for Dubai real estate is the funding gap to finish properties that are already started and on which investors are defaulting.

Eric Swats, head of asset management at Dubai based Rasmala Investments, said liquidity, which had started to return to the property market, will come under pressure as banks based in the United Arab Emirates try to limit their exposure to Dubai World.
‘They are going to have to take quite a big haircut because of the loans they provided to Dubai World and Nakheel.

As a result, they are likely to be less able to make mortgages and other types of funding,’ he said.

As well as the uncertainty surrounding Dubai World and its entities, the standstill could also affect other listed developers such as Emaar Properties, the UAE’s largest, Union Properties and Deyaar Development, it is claimed.

According to UBS the debt might even be more than is being publicly admitted, others suggest it could be double.

According to Davidson, those living and working in Dubai need to take off their rose-tinted spectacles.

‘You can’t trust the information that is coming out. Yes, Abu Dhabi could bail Dubai out with just one telephone call, but does it want to take on that much debt?’ he said.

‘It won’t be much help to the people that have put their life savings into property. Dubai’s reputation is in tatters. Credit agencies have reduced it to junk status.’