How has the current economic environment and the financial crisis of 2008 affected the real estate market in Dubai
It is now beyond doubt that Dubai and the entire Gulf region were affected by the global financial crisis of 2008. However Dubai has now managed to come back from the negative impact of the recession. This has translated into a recovery of the real estate market beginning the year 2010. Demand for properties has been on the rise as the economy began reviving and more employment opportunities being created. The point of concern in this paper is to review several literature materials in relation to the extent in which the market has been affected by the recent economic situation in Dubai and the global financial crisis.
The current economic situation in Dubai
The UAE is considered one of the most competitive economies in the world today according to financial analysts. There are challenges that the country has to therefore overcome in order to maintain its competitive position in the global market. The economy is faced by issues such as oversupply within the real estate industry, bond repayments, an ongoing debt restructuring. Despite the challenges, the state has made significant recovery steps from the effect of the global financial crisis in 2008. The economy is currently growing at a rate of 4.5 percent and this is an increase compared to last years’ rate of 3 percent. The main sector contributing to the growth of the economy is tourism. The economy used to rely heavily on oil but now oil only account for 3 percent of its gross domestic product. Despite such figures showing recovery from the crunch, real estate industry is still on a declining rate. However, there is some sense of recovery compared to earlier years.
The economic situation during the global financial crisis
The effect of the financial crisis started to be felt in Dubai and the greater Gulf region in early 2009. This is attributed to a short term insulation that the region had during the start of the global economic crunch. This insulation was due to the little exposure the region had to structured financial products. The region also had low levels of financial integration which further insulated it from the impacts of crisis. From fall 2009, Dubai and the entire Gulf state region began to feel the effect. The biggest blow was when foreign investors withdrew from the region’s markets. This affected several other industries including the real estate industry. Since Dubai has the second largest capital market in the region, the impact felt on Dubai’s real estate market was relatively huge. The losses made on its market capitalization according to Zaki et al. (2012), stood at 32%. This was however lower than that made by Saudi Arabia but higher than states such as Qatar, Abu Dhabi, and Kuwait. The losses necessitated interventions strategies to avoid further decline. Regulators in Dubai resorted to measures such as bond program and re-capitalization aimed at affected banks.
Impact on the real estate market
According to analysts, the real estate market was mainly impacted through creation of a dramatic shift in home buying. The prices of homes reduced significantly because of the fear of vacancies. At the same time, there were investors who preferred to hold their assets until the markets showed some sense positivity. Before, the crisis, properties in the region had shot up so highly in terms of prices and generally buying decisions were shifted away. However, during the crisis, there was mixed reactions among investors. The financial crisis implied that if they maintained the high prices, then prospects of ever influencing buyer decision to shift towards buying would be low. Therefore, the global financial crisis created a trend of reducing property prices.
Despite the reduction, there was still mixed reactions among buyers. According to analysis of the situation, there were three main perceptions or views by financial analysts that contributed to the confusion among buyers. The first perception is mainly based on the psychology of the buyers. The second was the supply and demand situation while the third view focused on the overall economic situation. It was expected that the situation will continue to be on the decline as prices of houses and properties continue to fall. It was also projected that it would take until mid 2011 for the state’s economy to make a rebound. Therefore, the downward trend witnessed in the real estate market was expected to continue until this period.
Balasubramanian (2010) says that before the country was hit by the effect of the global financial crisis, there was a perpetual and irrationally exuberant rise in real estate prices. However, when the prices began to drop as a result of the impact of the global economic crisis, the country saw a situation where there was excessive supply in real estate properties but the demand was dwindling. This situation is argued by Balasubramanian, (2010) to be the main reason behind the foundational shakeup of the current economic situatution. Balasubramanian further argues that the government of Dubai is heavily making investments in the real estate sector. This move can be very costly especially if the current decline in the real estate market persist. He notes that there is need to focus on other sectors of the economy in order to further stabilize the economy. It would not be prudent if the government fails to balance its investments across all sectors that support the economy.
The harsh impact of the global financial crisis in Dubai’s real estate market has also been asserted by Ibrahim, et al. (2012). According to this article, the Gulf region which include Dubai and other states, has witnessed a sharp increase in prices of real estate for a decade now.
However, the decelleration currently seen was mainly due to the impact of the global financial crisis in 2008. Ibrahim et al. (2012) notes that there have been several factors that contributed to the increase prior the economic crunch. These factors include oil boom, improved investment environment, and the post 9/11 attacks. However, these factors no longer come into play as the economy is strungling to pick up after the huge blow. Nonetheless, Ibrahim et al. (2012) also notes that these factors are still likely to help the real estate industry back on its feet. The country relies on tourism more for its GDP and economic growth. Oil boom period ended in 2008. The researves in the country have diminshed and based on the current rates of exhaution, they will be no reserves in the next 20 years. Therefore tourism has remianed to be the biggest economic pillar for the state. This means that invesotrs in tourism will have more money to invest in the real estate market. one factor that holds the hope for real estate market in Dubai, as noted by Ibrahim, is the improved investments environment. There are measures put in place which attract investors anytime.
It can however, be seen that even though the real estate market is gradually making a rebound, there is still significant losses made at the moment primarily because of the current economic situation and challenges. According to a market research report that looks at the real estate market of Dubai reveals a marginal recovery. Demand for real estate property has continued to increase thereby creating a balance between supply and demand. Since 2010, residential housing units in Dubai have become affordable because of the economic rebound. These two factors have been noted within the report to have been the major contributors to the recent marginal recovery.
According to the article by the slow recovery can be attributed to the cautious attitude of investors in approaching the situation. Based on the huge impact and downward trend of the real estate market in the country, investors are likely to avoid any further move or make an approach out of cautiousness. The article also identifies an increase in residential house purchase or rentals. This has been attributed to an increase in economic growth in the state. During the crisis, where the entire real estate market declined by up to 32 percent, many investors decided to flee the state in fear of further declining of the economy. However, the government was persistent in putting measures that continued to attract investors.
Zembowicz (2009) concurs with the assertions made by and , that Dubai has been a regional hub for the real estate market. The state has witnessed rapid expansion within the real estate sector estpecially with regards to housing and hotels. Despite all the flare and lavish extravagance, as noted by Zembowicz (2009), he says that the country does not operate like an isolated island. The country is very much connected to the rest of the world. This makes it vulnerable to any crisis that would occur across the world. Zembowicz (2009) says that there was no way the country could be insulated from the impact of the global financial crisis which began in the US. The global economic crisis therefore put a cooling pressure on the country’s booming real estate market.
Zembowicz (2009) says that the real estate market in Dubai relies on international consumers. This assertion is supports what Zaki, et al. (2012) says that residential housing are beginning to make a gain in the country’s real estate market. Since the country’ attracts a lot of foreign investors, residential properties are generally occupied by these investors. However, during the economic crunch, says that a lot of foreign investors fled the country in fear of an aggrevated situation. At the same time, the economic crisis meant that cash flow intot he country is decreasing. As noted by Zembowicz (2009), so many projects that relied on contructions and real estate were put on hold and there was a mass exodus of laborers.
Reference List
Balasubramanian, A., 2010. Rebuilding Dubai: Post-Bubble Economic Strategy.
Harvard International Review, 31(4), pp. 10-11.
Fodor, M., 2010. Free zones: Benefits and costs. Organisation for Economic
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Ibrahim, M. F., Ong, S. E. & Akinsomi, K., 2012. Shariah compliant real estate
development financing and investment in the Gulf Cooperation Council. Journal
of Property Investment & Finance, 30(2), pp. 175-197.
Renaud, B., 2012. International Articles: REAL ESTATE BUBBLE AND FINANCIAL
CRISIS IN DUBAI: DYNAMICS AND POLICY RESPONSES. Journal of Real
Estate Literature, 20(1), pp. 51-77.
Zaki, E., Bah, R. & Rao, A., 2012. Analysis of Financial Crisis in UAE Financial Markets.
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Zembowicz, F., 2009. Remodeling Dubai: The Emirate's Housing Market. Harvard
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