Economic storms dampen plans

Observers confident Government can manage an unprecedented twin decline in equity and property markets.

Traders witnessed a fifth consecutive day of falls at the Dubai Financial Market on Nov 12 2008.

Authorities are grappling with an unprecedented twin decline in equity and property markets as the global economic crisis buffets the region in ways few imagined just months ago. The Abu Dhabi Securities Exchange (ADX) and Dubai Financial Market (DFM) fell for a fifth straight trading session yesterday, leading GCC bourses deeper into a market rout that has become the worst in the history of the region.

The DFM has fallen 63 per cent this year. That surpasses the 52 per cent decline the market experienced from late 2005 to the middle of 2006. The ADX, which fell 47 per cent peak-to-trough in the 2005-2006 rout, is down 38 per cent so far this year. Markets in other GCC countries have experienced similar declines. They are being hit by the second wave of the global crisis. It began with a financial system meltdown but is now rippling out into a global recession some predict could become the worst downturn in decades, perhaps even since the 1930s. Unlike the last sustained market downturn, which the region's equity investors recovered from fairly quickly as the global economy grew, this time the woes are linked closely with stresses in the underlying economies of the region.

"There's a question not only for Dubai, but for all the region regarding the assumptions on which their expansion plans have been based," said Richard Fox, the head of sovereign ratings at Fitch in London. "They're going to probably revise them all down a bit." Credit, which just months ago flowed freely, has become scarce as regional banks have been cut off from gyrating international markets and curtailed lending at home. That has transformed property markets from free-wheeling bazaars where prices seemed to go nowhere but higher - especially in the secondary, off-plan market, where speculation reigned - into dens of sellers. Some are dumping properties to generate cash to meet margin calls from stockbrokers, or to fill holes in their portfolios created by the declines in their equities.

In the most recent gauge of the property market, the global bank HSBC Holdings issued a report yesterday saying property prices fell four per cent in Dubai and five per cent in Abu Dhabi last month. Some kinds of properties fell much more than that, the bank said, citing a 19 per cent decline in the prices of villas in Dubai during the month. It was the first time monthly prices had fallen, the bank said.

Meanwhile, oil prices have fallen to below US$60 per barrel from more than $147 just four months ago. Revenues for GCC producers remain well above spending levels, but the sharp decline has added to the atmosphere of constricting cash flows and scaled back investor expectations for the region's economic growth. Federal authorities and leaders in Dubai and Abu Dhabi have responded with a flurry of moves in recent weeks, starting with Dh120 billion (US$32.6bn) worth of funds that the Central Bank and Ministry of Finance have made available to banks. Some Dh50bn of that money has been placed as deposits in banks, which saw a steady outflow of funds in the past half year as foreign investors fled regional markets amid the global financial turmoil.

Those funds are aimed at assuring that banks continue lending for important infrastructure and building projects that are crucial to the country's economy - from power plants to marque property developments. The Central Bank has set up a task force to monitor markets, while Dubai's leadership has assembled a committee to examine major projects in the emirate and determine where financing should be focused.

Many observers say that while the global crisis will clearly hit the country's economy, the Government is in a strong position to manage the fallout. Mohieddine Kronfol, the managing director at Algebra Capital, figures the Government has sufficient resources to assure that current projects continue to receive funds and banks have the backing to deal with any fallout from a correction in the property market. He estimates that Dubai and companies the emirate controls must repay about $21bn in debt by the end of next year. With the resources of the Federal Government and, if necessary, even those of Abu Dhabi available in some cases, he said that should be possible, as well as provide help for any banks that might need it.

"You have essentially a $25bn to 30bn problem. Addressing it is now manageable with the resources that they have at their disposal." Emaar Properties, the Dubai-based developer, announced yesterday that it will ease the payment restrictions on property purchases to make it easier for buyers to afford properties. Buying homes has become significantly more difficult in recent months as the country's banks have tightened the requirements for obtaining loans. That, in turn, has contributed to the decline in property prices.

Also yesterday, the Dubai Government announced rules that would make it harder for buyers to back out of purchases during the period they are making payments. Emaar in some ways encapsulates the vicious cycle that has emerged between the equity and property markets. The company is one of the biggest builders and started the year as the largest capitalisation stock on the DFM. The company's shares have fallen 77 per cent so far this year, contributing more than 10 per cent to the overall decline in the market.

That has pinched the portfolios of many investors, some of whom have then had to raise cash by selling properties, helping push real estate prices lower. Falling real estate prices, in turn, are now contributing to concerns about Emaar's corporate performance as it moves to extend more credit and loosen restrictions on sales to try to encourage buyers. But Emaar is far from the only property company seeing declines. Sorouh Real Estate, an Abu Dhabi-based developer, saw its shares fall 9.5 per cent yesterday. Its shares have fallen 35 per cent in the past five trading sessions. @Email:[e-mail] * With additional reporting by Wayne Arnold and Travis Pantin