Real Estate in Dubai and the Financial Crisis

Dubai has been an emerald in terms of real estate growth on the world stage. It has seen tremendous growth during the years buoyed by tourism and the real estate market, backed by its oil-rich economy. As such, it has quickly emerged as one of the prime destinations in the world for tourists and home buyers alike and continues to foster development at new heights, even speculated to build some of the tallest buildings in the world soon. However, the financial crisis has slowed down this rapid growth to some extent.

The real estate sector in Dubai has been very important and has been seen to grow in prominence over the years. This has attracted international investors to the emirate making the sector a substantial contributor to the economy. It is estimated that the construction industry and Real Estate now account for nearly thirty percent of the GDP of the emirate (Pandit). Migration has been very important for Dubai in this regard. The local population of the emirate is said to account for less than ten percent of the population with the rest being made up of Asian and Western immigrants who flock to Dubai for jobs and its grandeur. However, these migration flows result in certain volatility which is a risk for demand in the real estate sector (Pandit).

The success story of Dubai in the property sector can be said to hinge a lot on borrowed labor and capital as well as speculative betting on Real Estate. These include mega projects such as The World, an artificial archipelago of nearly three hundred islands that are protected by a man-made breakwater and an artificial reef. There are also the palm islands, an area shaped in the water like a palm tree where the likes of David Beckham have been known to have purchased property (Dubai A new world.).

More ambitious projects include the kilometer length tower that was announced by Nakheel. These projects have been undertaken by state-owned enterprises known collectively as “Dubai Inc” including in the ranks Dubai World, Investment Corporation of Dubai, and Dubai Holding. Each of these has its master-developer: Nakheel, Emaar, and Dubai Properties respectively (Dubai A new world.).

The Real Estate market peaked around September of 2008 which was reached after foreigners were allowed to purchase freehold properties in designated areas of the emirate. After that, the credit crunch started taking its toll on the economy that was built on borrowed money. From the time when mega projects like the Jumeirah Garden were being scheduled and Dubai had 25 percent of the cranes in the world, Dubai’s Real Estate and construction saw a rapid decline (Black). Prices fell by nearly one-fourth in the last quarter of 2008 with the subsequent downfall in the following year as well.

It can be said that this decline in the Real Estate sector was something to be expected. The bubble had continued to grow and it had been supported artificially. With the economy built on a few defining features, having relied on oil-generated money to finance its growth had to blow off at some time. The arrival of the credit crunch took its toll on the way borrowed money was being used by the emirate to provide for its development. The debt of the emirate’s government, as well as the state-owned companies, is now said to sit at $80 billion. Nearly $11 billion of this is scheduled to be due this year which includes its interest payments (Black).

This has led to rapid restructuring efforts by some of the master-builder companies that the holding companies in Dubai boated of. Nakheel, Dubai Holdings, and Emaar are all scheduled to lay off workers in the years where some already have been (Black). This bodes more bad omens for the emirate as its means that many of the foreign immigrant workers, primarily from the west, would be without jobs. This inevitably means that according to Dubai’s policy, within a month of this joblessness, those workers would lose their right to live in Dubai which would alter the demographics in Dubai and lead to massive migration outwards (Dubai A new world)).

Reports by people on the ground point to an outflow of nearly half a million people from the emirate. Those families with school-age children that opted to stay till the end of the term may soon follow which does even more bad news for the future. In the past, this policy of Dubai helped it alter demand and supply automatically but now it may serve to make matters adverse as demand in the Real Estate sector reduces (Black).

Dubai’s stock market had given forewarning of this drop in the Real Estate sector in a sense. It stood at one time at a seventy percent low during the high time of the credit crunch. Once the effect trickled over to the Real Estate market, some mortgage firms like Tamweel had to be nationalized to bring some element of control to the declining sector (Black). One of the reasons that the situation in Dubai can be said to be worse off is the absence of automatic stabilizers in the economy.

Whereas in many countries once the economic decline is experienced, people lose jobs and start spending the money they get through welfare programs to replace that lost through jobs, in Dubai the trend is precipitated as the outflow of the foreign migrants with lost jobs means that this population is no longer available to spend in the region which makes a turn back even more difficult (Dubai A new World). What is generally needed in a time of decline like the one experienced by the emirate is some reconstruction of the faith in borrowing. This is what has been primarily addressed by Dubai in response to the decline in the Real Estate sector and development in the economy.

With rapid downward property prices, the policymakers at the heart of the emirate have attempted to stem the tide by taking measures to protect the development that had been taking place for a sustained level of time. This ailment has been coming from Abu Dhabi, one of the richest emirates in the combined United Arab Emirates. Its oil-rich resources have allowed it to have a massive reserve. Thus Abu Dhabi came to the rescue by purchasing nearly $10 billion in Dubai’s bonds through the UAE’s central bank (Dubai A new world). This has been the impetus that the policymakers were looking for. It has helped restore some level of confidence in the Real Estate business and the dripping cost of insurance is also a testament to the case that it is working to some extent (Pandit).

Other signs have also been positive in the wake of this bailout by Abu Dhabi. Mortgage makers have followed the trend of amelioration by making payment requirements significantly easier to provide a helpful injection to the economy. This has been in the form of more lax credit procedures banked on growing confidence and higher loan to value ratios. From there the figures have been turning better all over. Figures by HSBC show that prices in the emirate have started going up again (Dubai A new world). This is a considerable reverse from nearly a forty percent slump in Real Estate prices during the height of the crisis. The crucial demographics concerning Dubai’s migration flows also show a trend of evening out. People are still leaving the emirate but this is being balanced to some extent by more inflow as well (Pandit).

The up and down cycle that Dubai faced can be interpreted from multiple aspects. First off, the pace of the rapid development had been based on borrowing and investing and grand projects as well as growth in the Real Estate sector. Many critics pointed to this growth being artificial. Thus a downturn in this respect can be considered healthy for Dubai’s economy. The market had to correct itself for what can be termed as past excesses.

Since Dubai vies for a place among the world’s global hubs, it had to endure through price corrections sooner or later to continue on that trend which could not be based on artificial growth if it was to be sustainable. Another aspect to consider here though is the source of Dubai’s bailout. It was expected from the start that Abu Dhabi was going to bail out Dubai but the delay it took for it to come into action raised some eyebrows.

This raises questions regarding the kind of relationship the emirates enjoy which are ruled by different Sheikhs. Abu Dhabi has also asked for greater than four percent of interest rate on the bonds it purchased (Dubai A new world). These elements bring into doubt the viability of this bailout option for Dubai in the future. In this regard, it needs to make its Real Estate sector considerably more durable to be able to deal with bad times and not become subject to reverse stabilizers that its economy has.

There is some silver lining in this as well though. This bludgeon on its Real Estate sector seems to have opened eyes among the policymakers in the emirate. There is now a greater emphasis on establishing what can be termed as “soft infrastructure”. This is the use of western expertise such as financiers, lawmakers, and others that are being encouraged to come to the emirate and help set up a better system there which perhaps can be more durable in times to come (Dubai A new world). More good news has been on part of the Real Estate companies themselves. There have been efforts to diversify to meet the changing needs of the market. They have tried to diversify their product as speculation has dropped and more emphasis is now being put on catering to the end-user in the Real Estate business.

One significant change has been economizing through the use of newly brought out “calculator” tools (Dubai real estate companies diversify to meet market needs). This has been directed towards allowing shy buyers to determine the affordability of purchases they may want to make. One of these is a mortgage calculator set up by Landmark Properties which allows families wishing to buy a house to get an estimate of the installments they will have to pay. This encourages them to purchase what is within their limit and not shy away from Real Estate completely. Another calculator in this line allows customers to put in figures and judge whether it is more affordable for them to continue living on rent or purchase their own house.

Furthermore, as sales volumes have declined on account of the crisis, leasing has taken up increased importance in the current landscape. Companies have been quick to form partnerships with banks to allow them to take advantage of the situation. Valuation and advisory services have also been burgeoning in the Real Estate sector which is more common in mature markets like in the United Kingdom. Thus the market in Dubai seems to be taking more of a durable position after the volatile nature in the crisis days (Dubai real estate companies diversify to meet market needs).

Another strong element that has emerged relates to the presence of the older family businesses in the emirate. These were established in old by people tracing their lineage to Zanzibar or Iran and have rooted themselves into Dubai’s society. They have shown no signs of leaving Dubai in face of the downturn. They can thus be relied on as a stabilizing influence on the Real Estate market of the emirate in future times.

Thus it can be seen that the story of Dubai’s Real Estate market has been one of ups and downs. The extent of these however has been anything but normal. From possessing some of the most ambitious projects in the world ranging from artificial archipelagos to the tallest buildings, the emirate quickly became the brunt of international focus with relation to the drop in its construction and Real Estate business.

This can be said to have been a blessing in disguise in a sense as the previous growth was criticized by many as being artificial and transitory and this shock serves to correct prices and check growth in a healthy manner. Dubai may yet emerge as one of the great international hubs in the Real Estate business with a considerably more mature and diverse market if the recovery continues and is based on tangible measures that make the market more durable to fluctuating situations.

Works Cited

Black, Ian. “Downturn hits Dubai’s building bonanza.” Guardian. 2008. Guardian. Web.

“Dubai real estate companies diversify to meet market needs.” AMEInfo. 2009. AME Info. Web.

Dubai A new world.” The Economist. 2009. The Economist. Web.

Pandit, Mobin. “Dubai real estate sector shows signs of stability: Report.” The Peninsula. 2009. The Peninsula Qatar. Web.

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NerdyRoo. 2022. "Real Estate in Dubai and the Financial Crisis." June 21, 2022. https://nerdyroo.com/real-estate-in-dubai-and-the-financial-crisis/.

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NerdyRoo. (2022) 'Real Estate in Dubai and the Financial Crisis'. 21 June.

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