Dubai should take China's property market medicine

Property will continue to play an essential role in the economic development of both China and Dubai - but only if the business leaders and the authorities get it right.

It was a very Dubai moment, except that it happened in Shanghai. A few years back I was on a rooftop terrace in the heart of China's commercial capital in the company of Sir Rod Eddington, then the chief executive of British Airways. Rod, an affable host, was expounding on the dynamism of Shanghai's business culture. Beverage in hand, he swept his arm the length of the vista in front of us, taking in the Huangpu river and the eye-boggling vision of Pudong at night.

When I first came here 20 years ago," he said enthusiastically, "that was all mud flats and old wharves. Now just look." It was indeed hard to imagine that the high-rise silhouette of concrete, glass and neon had ever been anything other than a modern 21st century skyline, but in fact it had taken the Chinese just two decades to make that transformation. You get the same kind of reaction from long-term Dubai residents all the time. "When I first came here, that was just desert," they say, pointing to Sheikh Zayed Road, or the Marina, or Emirates Hills.

It illustrates the essential role that property has played and will continue to play in the economic development of both China and Dubai - but only if the business leaders and the authorities in the two countries get it right. There seems little doubt the Chinese have done exactly that. The country's property sector, which this time last year was in danger of collapsing like a burst balloon, has recovered to the point where developers and financiers are now looking once more to cash in on their investments through initial public offerings (IPOs) on the country's equally buoyant equity markets.

Reports from Hong Kong suggest there will be a flood of IPOs in the Chinese property sector later this year and early next, as property magnates revive deals that were shelved in the financial crisis last year. According to some estimates, up to US$5 billion (Dh18.36bn) will be raised on the Hong Kong market alone, before taking into account IPOs on the other, more frothy stock market in Shanghai. That is a huge vote of confidence in the long-term prospects for Chinese property.

There are two significant aspects to the reborn Chinese property boom. The first is the presence of big western firms as financial backers of the indigenous developers. International names such as Goldman Sachs and UBS are in the thick of the action, along with a list of private equity investors. These financiers lent money aggressively to Chinese developers on the basis of soaring land bank valuations before the crisis. But they did not pull out last autumn when those valuations fell sharply, but temporarily. Now they think the time is right to get some return.

The second factor is the role the Chinese government has played in putting the property sector back on track. While the West dithered over financial stimulus packages and quantitative easing measures, Beijing simply poured money directly into the hands of investors and developers through generous bank-lending programmes. Such are the benefits of the Chinese brand of state-directed totalitarian capitalism.

The UAE, and especially Dubai, can learn much from this approach. The UAE's central bank acted swiftly last autumn when it seemed financial activity was on the verge of freezing up completely, injecting billions into the banking system and agreeing to underwrite deposits. Proportionate to the size of the country's economy, the UAE's efforts at quantitative easing were more significant than those of the US and most of the European economies.

But the problem since that admirable initiative is that the country's banks have not been passing on the benefits of the stimulus to where it will really have an effect - the UAE's property investors, developers and end users. A recent report by the ratings agency Moody's Investors Service showed that growth in net loans was just 1.3 per cent so far this year, against an average of 37 per cent over the past five years. The banks are simply not lending fast enough to get the property market back on track.

The other difference between the Chinese and Dubai experiences is the absence of the big western financiers from the UAE property markets. Government restrictions on foreign land ownership made it unattractive for the international property funds and private equity groups to tie up large amounts of capital in UAE land banks. With limited international interest, it is now difficult to put accurate valuations on land assets as, for example, Dubai Property and Emaar are finding in the negotiations over their planned merger.

The Dubai property authorities should take a leaf from the Chinese book of economics, by directing more of the financial stimulus package at the property sector and opening it up to the rest of the world for investment. That will get this crucial market moving again. [e-mail]