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Announcement of rating downgrade:
Dubai, UAE

High yields in Dubai, but caution advised

BRIEF SUMMARY
Yields in Dubai are high, at up to 10.20%. Rents are spiralling. The shortage of property applies to all sectors. While there are positive factors, Dubai prices have risen steeply in the past four years and signs of speculative excess abound. We advise caution.

ARTICLE
Yields in Dubai are high, at up to 10.20%. Rents are spiraling, and long-term residents are being forced into smaller and smaller spaces. The shortage of property applies to all sectors. Offices tend to be small, conference rooms over-crowded and double-booked. Hotel construction has not kept pace with demand. Dubai prices have risen steeply in the past four years, and are now well above their regional peers.

Yet the story is more complex. Dubai is a real estate city, in which a large proportion of the population are either planning to build real estate, building real estate, selling real estate, or investing in real estate. This is a completely abnormal situation which has all the characteristics of a speculative bubble.

The current boom was started by large projects associated with government-linked companies, Nakheel and Emaar. The wealthy citizens of the UAE who were the initial investors made enormous profits. This encouraged less wealthy investors to buy. Many developers encourage clients to ‘buy and flip’.

When projects get delayed because of the severe skills and labour shortages, this fuels the impression that there is limitless demand since, in effect, finished property is in very short supply. The chaos of Dubai’s severely-overburdened infrastructure is such that a large portion of the population is always either waiting for a taxi, or stuck in a traffic jam. Building delays are the result.

There will be enormous amount of new property coming on to the market in the next 2-4 years in Dubai, notes EFG-Hermes, a Cairo-based investment bank.

This new supply will inevitably lead to a fall in prices.

In the long run (5-10 years) Dubai will be very attractive to businessmen and investors, because of its location on the long-haul air route between Asia and Europe, and proximity to Iran, Iraq, India, and Pakistan. But in our opinion it has simply overbuilt.

We expect price-falls over the next 2-3 years. We therefore downgrade our long-term rating on Dubai to 3-stars.

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