Dubai property in good place amid equity gyrations

The wild gyrations of the Dubai equity markets have been grabbing all the headlines recently, but there is a school of thought that they are of only marginal relevance in the emirate’s economic well-being.

Those who advocate this stance say that the only two indicators that matter are oil and property, and you can see their point. The Dubai Financial Market is tiny in comparison to the oil market. So far in December, the total value of shares traded on DFM in a very busy month has been Dh17 billion, a eye-blink for a crude broker.

The real estate market is not so big, of course, but it reaches far further into the everyday lives of citizens and residents, and has the ability – as was demonstrated cruelly in 2009 – to affect everything else if it goes wrong.

In contrast, apart from a few shock headlines, most people outside financial circles would hardly have noticed the swings of the DFM over recent weeks. Equity markets are certainly important, and play a central role in the growing financial sector in Dubai, but they do not have the same potential to spark crisis as oil and property.

Only in one extreme example has a fall in stock market prices and the oil price been followed by a collapse in property values and a general financial crisis, and that was in 2008-9. The DFM index peaked and began falling in late 2008, and nine months or so property prices began the slide all the way down to losses of as much as 60 per cent. Oil also fell dramatically, to near $40 a barrel by the end of the year.

However, that was against the backdrop of a global financial crisis unseen for more than 70 years and fears of a world recession, which as it turned out was very short-lived.

Those macro-factors are not present today. Sure, there are reasons to be cautious about global markets in 2015, with Russia, China and Europe the main clouds on the horizon. But these geopolitical risks are outside the control of Dubai policy-makers.

Despite the fact Dubai depends on oil for only a very small fraction of its income, the recent fall has the potential to worry the emirate, and its property market, in several ways. The removal of the “feel good factor”, the absence of property buyers from countries like Saudi Arabia and Russia, much more reliant on oil, and the tighter terms international financiers might offer Dubai proper developers.

Property prices in Dubai were beginning to flat-line well before the plunge in oil. Some experts believe they slipped by a few percentage points over the summer and autumn as new supply came on stream. The effect of recent falls in property prices will probably not be seen until early next year.

But it does not feel like 2009 all over again. With a series of measures introduced after that crash, the government has succeeded in virtually stamping out “flipping” altogether, and finance is harder to raise for speculative property buyers.

There is a lot of new supply coming on stream, but with the population forecast to grow by 50 per cent between now and 2020 there is also steady long-term flow of genuine demand to soak it all up.

Certainly buyers from oil-exporting countries whose livelihood is directly pegged to oil will be more cautious about where they invest, but the oil price fall has the effect of increasing the wealth of the majority of the world, who are oil consumers. Chinese, Indians and Europeans will be able to compensate for any shortfall in Saudi and Russian buyers.

In contrast to Dubai’s fevered equity markets, the real estate markets just seem more mature and better planned than at any time since foreigners were first allowed to buy in 2002. A couple of years of gentle growth would be a good thing.

External shocks – like the oil price – have the potential to throw even the best laid plans out of kilter, but policymakers should feel confident that they have done the best they can to ensure real estate does not again spark a systemic crisis.

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