Dubai Property Prices Will Fall Further says UBS

Dubai house prices will fall by up to 70% from their peak levels, says Swiss investment bank UBS. Having said that, we have seen prices for property for sale in Dubai already down to these levels, so this may actually be an optimistic outlook. There is a good argument that Dubai’s luxury property market will never recover, given the underlying fundamental issues – Pollution, falling expatriate populations, lack of laws to protect small investors, and an almost total lack of transparency. Top this off with the liquidity crisis in the financial system, and you have a recipe for disaster.

The Swiss investment bank said on Wednesday that property prices were more attractive than a few months ago but that prices would become even more attractive in the second half of the year.  “We believe the majority of investors would prefer to stay on the sidelines and revisit potential purchase opportunities in second half of 2009,” said a briefing note. The note, written by analyst Saud Masud, went on to say: “As we move past the summer season and potential for expat exits picks up, there is a likelihood that rents begin to drop faster than home prices thereby compressing rental yields.”

Dubai residential property may bottom at around AED500-800 psf, which is 70% below peak levels of around AED1,850 psf, the note said.

UBS described the recent bull run in UAE stock markets as unsustainable and downgraded property giants Emaar, Union Properties (UPP) and Aldar. Emaar and UPP were downgraded to sell from neutral, while Abu Dhabi master developer Aldar was downgraded to neutral from buy. Standard and Poor downgraded Emaar last December, and Moody’s Investors Service downgraded Emaar, which is the biggest developer in the Middle East, to just above “junk” status due to its exposure to the emirate’s struggling property market.

Moody’s downgraded its ratings for Emaar and Dubai Holding Commercial Operations Group by one notch each, taking Emaar’s rating to Baa1 from A3, two notches above “junk”. The outlook for both companies is negative. “The one-notch downgrade of both entities reflects the more severe fundamental strains facing their business models,” Philipp Lotter, Moody’s lead analyst for Gulf-based corporates, said in a statement.

UBS also initiated coverage of Sorouh with a sell rating, citing near term lack of demand.

“We don’t yet see fundamentals improving, hence we view overall systematic risk as mispriced,” Masud said.

Residential vacancy rates in Dubai may reach 25-30% by the end of 2010 as a result of oversupply and a 10% decline in the ex-pat population. UBS said it estimated Dubai’s total liabilities at $112bn, which includes a $42bn cost to finish all residential properties. The recent bond sale to Abu Dhabi may go some way to cover the shortfall, but we expect the funds to dry up in the next 3-6 months. It is fair to say that Dubai is close to collapse – the only thing keeping her propped up is Abu Dhabi’s oil reserves and the need for the world’s largest banks to have a place to launder money.