December 4th, 2004

How long can the Middle East real estate boom last?

Last week's massive Cityscape exhibition and conference in Dubai was a testament to the strength of the regional real estate market. Yet even the optimists are beginning to wonder how much longer this can continue: three to five years is the general view.

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In order to assess the likely length of the present Middle East real estate boom - and let us accept that all business, and property in particular, runs in cycles - we need to understand what lies behind this phenomenon.

Any visitor to Cityscape last week could hardly doubt the existence of a boom, indeed, a generational boom in Middle East real estate. What began with Emaar Properties' Dubai Marina four years ago has now spread across the region, with water-related land reclamation especially popular – and the bigger the better.

The strength of oil prices since the year 2000 is the most important factor underlying this boom. Even in Dubai the previous real estate slowdown was in 1998-99 when oil hit $10 a barrel. For a long period of high oil prices creates incredible liquidity in the Middle East, and that money has to be invested somewhere.

In the past Western capital markets would have absorbed the Petrodollars, and they still do to some extent. But since September 11th 2001, and subsequent events, there has been a reluctance to invest in the West, and indeed fear of the freezing of assets has brought much money back that was previously invested there.

Thus a climate ripe for a real estate boom was created. The additional spark to this fire has been the rapid opening up of real estate investment to foreign buyers and the removal of the previous barriers to freehold ownership. This still has further to go but it has been vital.

In the UAE a new real estate law is keenly awaited, and will mark another major step in shifting property values towards international levels. And presently for all the worries about surging prices, property in Dubai remains cheap in absolute and relative terms by international standards. So money will flow to the lowest cost option.

Local mortgage finance institutions are also in their infancy, partly due to the legal situation. For example, Standard Chartered Bank will not lend on Dubai property while this is a major activity for the bank in its other major markets. Lloyds TSB is the latest bank to join the list of Dubai mortgage lenders.

When these two factors change there will be more confidence, more investors and more money. Such a triple alliance surely means higher prices – or at least prices closer to international levels. There is not room here to review the other regional markets but this same pattern of deregulating a formerly restricted property market holds true.

Now with the level of investment currently committed to new real estate projects across the Middle East, and most of it from sources that will not dry up the moment oil prices dip, there is absolutely no valid argument that the present real estate could come to an end overnight. Even a regional emergency would spike oil prices, which would hardly be bad news for the flow of money into real estate here.

What looks far more probable is that building will eventually overtake demand, but only sometime after real estate prices have reached a substantially higher level than exists today. Why should a villa in Dubai cost less than one-third of the cost of a house outside London? Disposable income is probably higher in Dubai.

Only when real estate prices in the Middle East start to approximate to average global prices – perhaps Singapore is the benchmark – should investors begin to feel concerned.

In the meantime there is plenty of money for investors, speculators and end-users in this great property boom, although it is heartening to see the Dubai authorities taking effective action to put a cap on the profits of speculators who have ruined many property booms before with excessive greed.

Eventually there will be a position when too much new-build comes into the market at prices that are no longer behind world prices. At that time property owners will have to decide whether to get out quickly, or hold on through a slowdown.

And in property those with a long-term perspective do best in the long run, although this maybe a lesson that has to be learned painfully by some in the region.