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Abu Dhabi bailout does little to dampen concerns about Dubai real estate market

Dubai's ailing property market had shown tentative signs of recovery in recent weeks after prices fell by up to 50% in the last year but when state backed Dubai World sought a standstill on debts of $26 billion that dealt a serious blow.

Abu Dhabi stepped in earlier this week to prevent Dubai World’s development arm Nakheel, from defaulting on a $4.1 billion Islamic bond due on December 14, but the move has seriously dented investor confidence.

‘It will definitely delay the recovery of the property market by 18 months to the second half of 2011,’ said Patrick Rahal, a Doha-based senior analyst at The First Investor bank.
Others are more pessimistic. ‘I wouldn't like to even guess when this market might return to the good times,’ said Jonathan Thompson, global head of real estate at KPMG in London.

The handling of the situation has not helped with the announcement that Dubai World was seeking a six month delay on paying its creditors coming in the middle of a religious holiday. Some are wondering if there is more bad news to come.

However the psychological impact of the bailout is positive even although the market is still fundamentally weak, according to Saud Masud, head of research and senior real estate analyst for the Middle East and North Africa at UBS.

The main problem is still oversupply, he said, and property prices are expected to drop another 20 to 30% by the middle of 2011. The spectre of fresh fire sales now haunts the market and this could dilute the impact of the Abu Dhabi's bailout package.

Also investors shocked by the government's decision not to guarantee the debts of related entities like Nakheel will encourage some nervous investors to pull out early, putting new downward pressure on prices, according to Sana Kapadia, vice president of equity research at Egyptian bank EFG Hermes in Dubai.

A number of international property investors had already relegated the emirate to the bottom of their property investment wish lists. Even opportunistic property investors like London's Enstar Capital are retreating from Dubai, citing concerns that the current debt restructuring is just the beginning. ‘One of our biggest fears is that Dubai's reported debts of $75 billion are actually in fact much larger,’ said Enstar co-founder Farid Alizadeh.

‘Having seen what has happened in Iceland and others, investors in such times go to what are deemed safe havens and if Abu Dhabi is bailing Dubai out then it will be Abu Dhabi which will be deemed a safe haven and not Dubai,’ Enstar co-founder Simon Lyons added.