Dubai is at such an interesting juncture that it lends itself to analyst opinions that are mutually challenging. There are enough silver lines on the horizon for those who tend to approach issues with a sense of optimism. But for those who are inclined to look the other way, there is an uneasy déjà vu setting in.
As the local stock market gets ready to bask under the glow of “emerging markets” status in about two months’ time, a milestone development that has already played out twice over in terms of its excitement, there are increasing threats of funds going out in favour of other GCC markets where assets are more realistically priced. So, the timing of the benchmark index’s inclusion in the upgraded category looks somewhat out of context.
No one has any doubt about Dubai’s current boom. The continuing economic upswing, according to most analysts, is much more resilient to exogenous shocks compared to the situation that led to the global financial crisis and the downturn that held sway for a considerably long period. Although there has been some concern over the sustainability of some of the asset price inflation, most analysts agree that such risk is well within manageable limits, which is a very positive factor.
In terms of more specific parameters, GDP growth for 2013 has hit 4.7 per cent and is on a rising trend. All other factors that represent economic activity are also on the upswing, with trade, hospitality and tourism turning in impressive numbers, presenting a fundamentally strong economic story. Similarly, liquidity is much stronger compared to 2008, with speculative inflows linked to the possibility of currency revaluation as well as credit expansion at unsustainable rates, the two major triggers for the blowout, totally absent this time around.
Most significantly, the authorities appear to be veering round to the view that Dubai’s sustainable growth in future need not necessarily be real estate centric, particularly the residential market, as was the case with the previous boom. It is being recognized that Dubai’s financial and economic landscape is changing rapidly so as to encompass additional growth areas.
Even within the property sector, there is probably a shift taking place towards commercial real estate, compared to the overriding importance that the residential market commanded during the previous boom.
Still, it’s a sense of déjà vu for some analysts who are still searching for reasons to be convinced the surge in property prices are not driven by speculation. Their main cause of worry is that, despite all the precautionary measures and fee hikes, prices are less than 10 per cent off their peak of 2008 and are in danger of surpassing those peaks this year itself. Exuberance on such scale can really overshadow fundamentals.
The scale of increase in asset values along with other anecdotal evidence suggests that some level of speculative demand is back and there is a risk of aggregate supply far exceeding underlying end-user demand. The casualties of such a situation are two-pronged: price increases beyond levels justified by fundamentals and a spurt in construction activity in response to inflated demand.
Both were major causes for the 2008 bubble. The overdose of enthusiasm could encourage developers to throw caution to embark on fancy developments, which can become a liability to not only themselves, but all the stakeholders and players in the larger economy.
The failure to bring about any major reduction in Dubai’s overall credit leveraging is a lingering concern, although a major part of the existing debt has been refinanced on more favourable terms. This might, in turn, encourage further leveraged borrowings, resulting in a re-emergence of vulnerabilities that had already spelt serious trouble to Dubai’s economy in the previous boom cycle and ending in the inevitable bust.
Another such cycle is hardly affordable and therefore least welcome.