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Dubai debt fallout expected to hit US commercial property market

‘With a global economy we are all attached at the hip financially in some way, shape or form.

This downturn has had more of a global impact than any other,’ said Tony Ciochetti, chairman of the Massachusetts Institute of Technology’s Center for Real Estate.

Firstly it is expected to impact on the US economy which will have an effect on the real estate market which has been showing signs in recent weeks of bottoming out.

Secondly if Dubai World, parent company of master developer Nakheel, decides to off load some of its prestigious property in the US this could lead to a decline in prices.

‘Dubai may have to unload some very prestigious properties at distressed prices and this will drive the price of all commercial real estate lower,’ said Richard Bove, a banking analyst at Rochdale Securities in Lutz, Florida.

In the US, Dubai World's portfolio includes several well-known properties, and the fallout could have a larger impact on the entire real estate market.

The company is a partner with casino operator MGM Mirage in the $8.5 billion CityCenter project, which would add 6,000 rooms to a Las Vegas Strip gambling corridor already saturated with unoccupied hotel rooms.

Nakheel, best known as the developer of Dubai's palm shaped islands, also carries the Mandarin Oriental and W hotels in New York in its portfolio, and has a 50% stake in the Fontainebleau Miami Beach resort.

And, through its Istithmar affiliate, Dubai World controls the upscale retailer Barneys New York.

Another threat to the US commercial property from Dubai World woes may be the potential for contagion, according to Sam Chandan, chief economist at Real Estate Econometrics in New York.

‘It has the potential to spill over into the broader perception of real estate development and real estate as being a very risky area for exposure,’ he explained.

US commercial real estate values have already fallen 42.9% from their 2007 peak, according to the latest figures from Moody's Investors Service.

Last month, delinquencies on US commercial real estate loans that were packaged into commercial mortgage-backed securities reached 4.8%, more than six times the year earlier level, according to figures from Trepp in New York.

Dubai World's holdings go far beyond real estate. It has a 20% stake in Canada's Cirque du Soleil, and also invests in the global bank Standard Chartered and New York boutique investment bank Perella Weinberg Partners.