Q: Do you anticipate widespread defaults in the UAE in light of the global credit crisis? Which sectors are most likely to be affected? How will this affect the internal dynamics of the United Arab Emirates and wider politics within the region? What would this mean for risk for other investments in Dubai and the region, such as real estate?
A: We do not think defaults will be the major issue for businesses and financial institutions in the UAE. Despite the high volume of projects announced in real estate, infrastructure, retail and other sectors over recent years, much of this work is being funded by local banks or large semi-public developers and holding companies. Abu Dhabi has amassed a sovereign wealth fund estimated at $350 billion and has readily provided financial support for the UAE’s troubled banks. It has also backed its large real estate developers, minimising the risk of defaults.
Instead, what we are likely to see in the UAE are widespread project delays and cancellations especially in real estate, including commercial and residential developments. Around half of the country’s projects have been cancelled or placed on hold since the financial crisis hit the UAE in late-2008. This is mainly due to falling demand amidst a global recession and a substantial oversupply of high-end luxury developments, especially in Dubai. A $10 billion bailout of Dubai by Abu Dhabi increased local banks’ deposits and mortgage lending but did not address the key issues of oversupply and falling demand which will continue to drive project cancellations and delays going forward. HSBC estimates property prices in Dubai fell by 40 percent in September 2008-March 2009 and the large developers which dominate the sector have cut their workforce substantially. Significant population shrinkage (5 percent to 30 percent) is expected this year in Dubai and will worsen the problem.
We also anticipate delays and cancellations in industrial developments manufacturing commodities like steel, glass and concrete as demand for these follows trends in the real estate sector. For example, Pilkington Emirates has cancelled plans to build a $200 million glass factory and Al-Tuwairqi Group has stopped work on a $400 million steel melt shop.
Risks will increase beyond July 2009 when many expatriate families plan to leave the UAE at the end of their children’s academic year, further denting demand. Enforcement of penalties for delays and cancellations is likely to be inconsistent as courts seldom rule in favour of non-nationals, so foreign investors who have already committed money to developers are particularly exposed.