Dubai's Illusory Real Estate Rebound

In the past few weeks, several high-profile Dubai construction projects on hold since the global financial meltdown of 2008 have been revived. Among the eye-catchers: a skyscraper with nine swimming pools, a mile-long canal winding its way around office buildings, and a replica of the Taj Mahal a mere four times bigger than the original.
The commercial property market isn’t much better: About a third of the office space in the central business district is unoccupied, and the vacancy rate is much higher in other neighborhoods. New developments will add about 9.7 million square feet next year, equal to 13 percent of the existing space in Dubai’s business quarter. “The market has improved to some extent, but there isn’t enough to justify going ahead with all the projects that are now being talked about,” says Craig Plumb, Jones Lang’s head of research for the Middle East and North Africa. “They should be phased over a longer period and should be built in line with demand.”
Since 2008, $757 billion worth of projects have been delayed or shelved in the U.A.E., according to an October Citigroup (C) report. That’s more than the combined value of projects canceled in Egypt, Iraq, Kuwait, Saudi Arabia, and Qatar. Some developers continue holding on to clients’ cash as projects remain half-built and court disputes drag on.
The increased demand is mostly from Indian, Pakistani, and Iranian investors drawn to the relative stability of Dubai since the euro crisis and the Arab Spring, says Jan Pawel Hasman, an analyst at investment bank EFG-Hermes Holding in Cairo. Saud Masud, chief executive officer of New York-based investment firm SM Advisory Group, says the upswing isn’t sustainable without steady population and job growth. “The oversupply issue will probably not be resolved for perhaps another decade,” Masud says.
Dubai builders have deferred some dreams, but not all. The oversized Taj Mahal, dubbed Taj Arabia, was designed as part of the Falconcity of Wonders, a 41 million-sq.-ft. complex of homes, offices, hotels, and stores, along with replicas of the Pyramids, the Great Wall of China, the Eiffel Tower, and the Leaning Tower of Pisa. While the rest of Falconcity remains shelved, developer Link Global says the Taj Arabia, slated to include a 300-room luxury hotel, will cost about 1.3 billion dirhams and take two years to build. Chairman Arun Mehra declined to say how the company will pay for it.
Tightening credit may limit oversupply, says Dubai-based EFG-Hermes analyst Shabbir Malik, noting that lending to developers rose just 3 percent in the first quarter from the same period last year. New government restrictions on banking liquidity set to go into effect next year are also likely to hinder lending, Malik says.
The bottom line: Dubai builders have sidelined $757 billion worth of projects since 2008, and the local property market still faces an inventory glut.