UAE REAL ESTATE: DOWN BUT NOT OUT

UNCLAS SECTION 01 OF 02 ABU DHABI 000674

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN SOCI PGOV AE

SUBJECT: UAE REAL ESTATE: DOWN BUT NOT OUT

REFS: A) DUBAI 12
B) 08 ABU DHABI 1285


1. (SBU) Summary: That the UAE experienced a real estate boom
through early 2008 is well known. Equally well know is that the
Emirates experience a subsequent bust driven in part by the world
financial crisis. In response, UAE federal and local governments
strengthened much needed real estate regulations, and developers
consolidated and cut back projects. The market is now seeing
promising indications of stabilization, although concerns remain.
Analysts say Gulf investors remain interested in the UAE property
market, while local residents continue to look for real estate
bargains. End Summary.

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The Boom
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2. (SBU) During 2007 and early 2008, the prices of UAE real estate
increased significantly, shooting up almost 300 percent. (Note:
Much of this growth was driven by new policies allowing foreigners
to buy dwellings, but not the underlying land. End Note.) The
spectacular returns led to significant speculation (in the form of
rapid purchase and resale known as "flipping") and investments by
many who had no intention of living in the properties they bought.
Strong economic growth led to a demand outstripping available supply
(especially in Abu Dhabi) driving up prices, according to Redha
Maslam, Director of Tharwat Economic Consultancy Company.
Residential and commercial rent in all emirates, particularly Abu
Dhabi and Dubai, rose significantly, crossing 100 percent for some
apartments. The UAEG passed laws to cap annual rent increase at
five percent in Abu Dhabi and in Dubai, but little regulation of
property sales existed.

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The Bust
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3. (SBU) According to Property Wire report, UAE real estate prices
have declined 65 percent from September 2008. Owners, unable to
secure loans or now unemployed, refused to make installment
payments, asked for revised payment plans or just abandoned their
down payments. Many developers were unable to continue construction
or pay subcontractors for completed work. Morgan Stanley estimates
that more than USD 260 billion in projects have been cancelled or
postponed in the past year. Market studies indicate that rental
prices have now fallen to 2006 levels in Dubai, and early 2008
prices in Abu Dhabi. Dubai's Real Estate Regulatory Authority
(RERA) statistics indicate that the average annual rent for a studio
in Dubai Marina now ranges from USD 17,697 to USD 20,419, from a
peak of USD 24,503. A one-bedroom apartment in the Greens
development now has declined to USD 24,503 from USD 35,383.
Expatriates working in Abu Dhabi are increasingly commuting from
cheaper rentals in Dubai, as the capital's rental demand still
outstrips supply (Ref B).

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GOVERNMENT RESPONSE
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4. (SBU) As prices collapsed, government officials moved swiftly to
regulate and support the real estate market. The Dubai Land
Department issued an amended law (No. 9 of 2009) to help developers
complete projects. The retroactive law ties buyer refunds to the
project completion, making it harder for investors to exit
properties near completion. Amendments stipulate that in cases
where developers have completed at least 80 percent of construction,
a purchaser who defaults will lose all the money paid. Abu Dhabi
and Ras Al Khaimah are also creating real estate regulatory
authorities, modeled after Dubai's RERA, to regulate the sector,
particularly "off-plan" developments (Ref A).


5. (SBU) In an effort to attract new investors and retain current
owners, the UAE Ministry of Interior finally clarified in May that
foreigners who own developed real estate (valued at over USD 270,000
(AED 1 million) can enter the country on a multiple entry visa and
stay up to a maximum of six months. While some investors claim
other requirements, such as having a fixed monthly income of almost
USD 2,723 (AED 10,000) are excessive, clear regulations are
appreciated. The federal and local governments are also encouraging
mortgage industry growth to spur new purchases. Historically, few
Emirati properties were financed with a mortgage, as nationals
received government assistance and expatriates were not allowed to
buy real estate (prior to the recent liberalization). The industry
was tarnished by the near bankruptcy of two of the UAE's largest
mortgage lenders, Amlak and Tamweel, who have been rumored to be
slotted for merger, perhaps with the newly created Emirates
Development Bank. However, the CEO of the new Abu Dhabi Finance
Company told EconOff that consumer interest in his products remains
high.


ABU DHABI 00000674 002 OF 002


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Signs of Recovery
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6. (SBU) As summer approaches, reports indicate signs of
stabilization -- and even recovery. Press reports indicate that Abu
Dhabi rents have risen as much as 20 percent, while Dubai property
sales rose six percent in recent weeks. A recent HSBC survey shows
real estate prices rose four percent in April and five percent in
May 2009, but warned that it is too early to call it a trend.
According to the report, the stabilization in pricing appears to be
the result of several factors, including: low base prices,
improving liquidity, declining mortgage rates, attractive rental
yields, robust volumes, and improving consumer confidence. Foreign
investors also seem to be back in the market, and the majority of
transactions are being conducted without financing. Industry
analysts report Gulf investors continue to have strong interest in
UAE real estate, particularly in Dubai, which remains a popular
regional destination for business and tourism. One Dubai business
man told us capital flight from Iran and Pakistan has also prompted
significant new investment in Dubai in the past 1-2 months.


7. (SBU) However, others remain pessimistic. A senior Abu Dhabi
government official believes real estate prices may continue to
decline through 2010. Faysal Urfali, General Manager of
International Development Company (IDC),a leading Abu Dhabi
business group, told EconAssistant that he did not expect the Dubai
real estate sector to fully recover before late 2010. The
unrealistic prices of the boom have fallen, but demand is still
slowing. In contrast, properties in Abu Dhabi are still demanded by
foreigners, even in areas which are not yet allotted for foreign
ownership.


8. (SBU) Comment: While prices appear to be stabilizing, most
investors recognize that the dizzying returns of 2007 are gone for
good. Dubai's focus has clearly shifted from real estate to core
business in logistics and services. Abu Dhabi's economic
development plan targets diversification in non-construction
sectors, particularly industry and manufacturing. The new line from
many Emirati business and political leaders is that the worst is
over, but the full extent of real estate losses -- and related
financial sector repercussions - likely remains to be seen. End
Comment.
OLSON