Analyst warns of potential Dubai property bubble

Concerns about ambitious projects leading to another boom-bust cycle

Plans for Mall of the World in Dubai
Plans for Mall of the World in Dubai

The announcement by Dubai Holding last week that it is to launch the world's biggest shopping mall, the 8 million square feet Mall of the World, has led to one analyst warning of "potential policymaking complacency" and risks of another real estate bubble.

Dubai Holding's chief executive Ahmad Bin Byat last week told Reuters that the project, which will contain the world's biggest indoor theme park, a new theatre district and 100 new hotels with up to 20,000 rooms, would be built over 10 years and require $6.9bn in financing.

Around 50% of this will be generated from Dubai Holding's own resources, with the rest due to come either from international debt markets, the sale of parts of the project or from pre-lease and partnership deals.

However, in an Emerging Markets update, Bank of America Merril Lynch's analyst Jean Michel Saliba said: "We worry about potential policymaking complacency and that such ambitious projects could lead to another boom-bust real estate cycle, particularly as there has not yet been major deleveraging in the economy.

The International Monetary Fund has also warned of the possibility of another property bubble developing in Dubai, where average prices increased by around 20% last year, according to Jones Lang LaSalle.

Ratings agency Moody's also warned in research on Emaar Properties that that Dubai's pre-eminent property firm faces a potential risk due to 'exuberance' in the Emirate's property market, which means that it faces the risk of overcapacity.

Moody's analyst Rehan Akbar said: "There is a risk that the company embarks on a significant multi-year capital spending plan in the current market up-cycle to not only launch new developments but also expand its hospitality and retail assets at a time when competitors are increasingly becoming active in these sectors, which could create overcapacity."

Moody's said that regulation was unlikely to reign in domestic property speculation, which is a cause for concern as prices are close to, or have already reached, pre-crisis peaks.

The agency said that it was "cautious about the sustainability of current trends as it believes property prices are already at the upper bound of affordability for many end-users".

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