Wednesday, March 13, 2013

Economic Insights: Dubai Recovery

For many years, Dubai has been positioned as the regional business hub with some very key assets such as infrastructure, trade and tourism.

Dubai has invested a lot in building those core assets over the years and in the last few years before the financial crisis, the real estate market in Dubai has witnessed humongous growth, forming a classical real estate bubble. Yet this bubble continued growing and flourishing for few years leading to tons of money being injected from all over the region into Dubai to gain from the huge returns of investing in such bubble.

Yet with the global financial crisis in 2008, Dubai had to go through a very rough economic downturn for the last few years, which has led to the burst of the real estate bubble, leading to a significant decrease in property prices that exceeded more than 50% of the property’s value in many cases.

Such economic downturn has resulted into a sovereign debt problem, where Dubai couldn't pay some of its outstanding debts. Wasn't it for Abu Dhabi and its great support, Dubai would have been bankrupt. But such kind of support from Abu Dhabi, though being very generous, it was not able to help re-switch the economy but only helped keep Dubai economy from collapsing.

Yet throughout 2009 and 2010, Dubai has been witnessing a very slow economy and a very dormant property market to the extent that many people started to claim that Dubai lost its charm.

Then the Arab Spring started taking place end of 2010 in Tunisia, then in Egypt in early 2011 and in other places around the region such as Libya, Syria, Bahrain and Yemen. Though the Arab Spring movements have generally impacted the business environment negatively, its impact on Dubai has been very positive, where many people especially people from the old regimes in the countries that witnessed revolutions viewed Dubai as safe place for their savings and investments.

Viewed as a “safe” for savings and investments, Dubai has witnessed huge cash influx throughout 2011 and 2012 from those Arab Spring countries especially Egypt, Tunisia and Syria, resulting into increases in bank deposits in UAE in general and Dubai in specific, as highlighted by several official notes. The cash influx coming into Dubai has had a very positive effect on the economy which started to show big signs of recovery by the end of 2011 and in 2012 the economy has definitely exceeded all expectations.

Such positive economic developments have had great impacts on the property market, which started to recover back and property prices started to go upwards at very high rates though the property prices didn't fully recover their previous levels. This trend has also impacted rentals which are witnessing increasing levels over the past few months.

This is all great news. But can Dubai property market live without forming a bubble?

The answer seems to be “NO”. As the property market started to pick up, it showed very high increases in prices for few consecutive months. This has attracted many investors, regionally and globally, to invest in the property market as they look for phenomenal returns that can’t be made without speculating for high growth. So simply a new real estate bubble is in the making, with all the people involved in it aware that it is a bubble but very happy they are making such huge returns.

But on the other hand, the tourism market, being one of Dubai core assets, has picked up very well, where Dubai has become the destination for many regional tourists especially Saudis due to problems in Egypt, Syria, Lebanon and Bahrain. This development has very positive impact on all related sectors such as retail and others. Besides, Dubai has been able to position itself as a tourist destination for tourists from all over the world that go to visit some of the never ending Dubai wonders.

In addition, Dubai state-of-the-art infrastructure and business friendly ecosystem has helped Dubai to attract companies and individuals from all over the world to get based out of Dubai to serve the Middle East region and in some cases other nearby regions.

Bottom line: Thanks to many factors, on top of which is the Arab Spring, Dubai is recovering and capitalizing on its core assets of tourism and infrastructure. At the same time, a new real estate bubble is in the making, and it is happening too fast…

(Note: This is an aggregated analysis. For more details, people can check different news and updates shared in the page)

Omar El-Shenety


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