JUL. 19, 2014
Plans were announced on July 5th to build the Mall of the World, a mixed-use complex incorporating the world's largest shopping mall, to be built in the heart of Dubai.
A number of other mega-projects have also been announced in recent months. Although these plans reflect strong economic momentum in the UAE, they are also a cause for concern, presenting the risk of a dangerous mix of fresh debt and overcapacity emerging in the medium term. Further policy measures are needed to address these concerns.
The Mall of the World, to be completed by Dubai Holding, follows a number of other mega-projects announced recently, notably Deira Islands (a 15.3-km waterfront cluster of hotels, residential areas, resorts and retail) and Mohammed bin Rashid City District One (a development of 1,500 villas), while leading developers Emaar Properties, Nakheel and Dubai Properties have all unveiled new phases of existing projects.
Back To The Peak
The development frenzy comes as developers look to ride a surging wave of optimism about the property market. House prices in some areas have already rebounded past the previous peak reached in 2008. But the extent of new projects is fuel ling worries about the danger of overcapacity and the emirate lurching back into a renewed boom and bust cycle.
That happened previously in the wake of the global financial crisis of 2008 when a credit freeze and a loss of investor confidence caused values to tumble by more than half from their peaks. The ensuing meltdown prompted developers including Emaar Properties, Dubai Properties, Nakheel and Dubai Holding to stall projects or abandon them altogether. The latter two were particularly hard hit and underwent painful debt restructuring from which they have emerged only relatively recently. Since then Dubai's economy has regained strength and the financial health of large corporates, including developers, has significantly improved.
One of the reasons for the sudden slew of project announcements has been expectation about future growth stemming from Dubai winning in November the right to host the World Expo 2020. Dubai government officials have suggested population estimates are likely to have to be revised upwards as more people move to the emirate to live and work. Under the existing Dubai Urban Plan 2020, the population is envisioned as rising to between 2.8m and 3.2m by 2020. The population reached 2.2m last year. The event is also expected to boost visitor numbers, with as many as 25m people forecast to attend the six-month-long event, 70% of whom travel ling from overseas. Developers are not only banking on the extra residents to provide a steady stream of buyers for new residential projects, but also hope the visitors will help fill the vast amounts of retail and hotel space planned.
There are obvious risks from focusing building around a single event. Although the population of Dubai may continue to rise steadily, there is the possibility that malls, hotels and other developments may suffer once the expo ends and visitors depart. The target is to almost double the number of planned hotel rooms to as many as 160,000 by 2020.
The building boom also holds further risks. Residential prices are already at the upper limit of affordability for many buyers, and recently announced projects are being traded at 5-30% premiums. Many developers are offering relaxed payment plans to generate interest. Fueling a further potential weakness in the market, many of the new developments involve off-plan sales, meaning investors are sometimes putting down deposits for properties that may not be built for several years.
With many of the projects aimed at similar market segments-apartments, villas, malls and hotels-there is a danger of overcapacity. The Moody's ratings agency last week warned of such a risk for Emaar Properties, considered the most blue chip of the emirate's developers with diversified interests in retail and hospitality as well as property.
Policy To Curb Excess
The government has taken measures to try to curb speculation in the market, including tightening loan to value ratios on new mortgage applications and doubling property registration fees from 2% to 4% (although this is still a rather low rate). Government officials have also stressed that projects will be carefully planned and delivered to minimize the risk of overcapacity. Some contracts for off-plan sales have started to include clauses to limit flipping.
There are signs the government steps may be having some effect or it may just be a case of the market pausing for breath to assess valuations. Growth in prices in Dubai's residential property market slowed to 3% in the first quarter of the year from the previous quarter. That compared to almost 6% growth in the fourth quarter of last year, according to Cluttons, the property services company.
Old And New Debt
Still, any slowing in price growth has not translated yet into a slowdown in new projects. The Mall of the World is perhaps the most ambitious scheme to be announced by the emirate since the financial crisis, requiring Dh25bn (US$6.8bn) in financing over ten years. Dubai Holding expects half of the financing to come from internal resources and the rest through the debt market, sales of parts of the project, revenue from leasing, and partnerships.
The financing required for this and the other mega-projects lays the potential for fresh debt challenges. Dubai Holding, an investment company owned by Dubai's ruler, was one of several government-linked companies that borrowed heavily during the pre-2008 years. Its Dubai Group unit struck a final deal with creditors in January to restructure its US$10bn debt. Much other debt attached to government companies has also been restructured or rolled over. According to media reports in July, Dubai World is seeking to extend the terms of a US$10.5bn loan maturing in 2018; Dubai World also faces around US$4.1bn in maturing debt in September 2015.
Further Policy Measures Required
The establishment of a central unit to manage the combined debt of all such companies might help to mitigate the danger of future financial stress. There are other more immediate steps officials could consider to safeguard the economy against oversupply. Following the example of Hong Kong and Singapore by bringing in higher fees on property transactions could help to dampen market speculation. There is discussion of this among officials, with one possibility to introduce a sliding scale, with higher fees linked to those selling on properties quickly.
Officials also have to take a proactive approach to ensuring the number of project launches are limited, while those that do go ahead are delivered in stages in line with market demand. If policymakers are complacent and take no action at all, there is a real risk of Dubai slipping back into the boom and bust cycle of previous years.
About the Author
Jamal Moustafaev, MBA, PMP – president and founder of Thinktank Consulting is an internationally acclaimed expert and speaker in the areas of project/portfolio management, scope definition, process improvement and corporate training. Jamal Moustafaev has done work for private-sector companies and government organizations in Canada, US, Asia, Europe and Middle East. Read Jamal’s Blog @ www.thinktankconsulting.ca
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