5 arguments against another realty crisis in the UAE

UAE real estate not as vulnerable to shocks as it was in 2009

Ratings agency Standard & Poor’s in its latest report estimates a ten percent to 20 percent correction in UAE real estate prices this year due to additional supply and lesser demand.

However, despite several macroeconomic headwinds and a softer market – especially for residential realty and hospitality – in 2015 and early 2016, the country is unlikely to witness a 2009-like crisis scenario.

Here are S&P’s 5 arguments against another market crisis in the real estate sector:

1. More diversified economy/buyer market

Non-oil contributions to GDP and employment, as well as non-national investors whose spending power is unaffected by oil prices will mitigate an erosion in demand directly linked to the oil sector.

2. Supportive demographics

S&P assumes five to six percent population growth for Dubai and seven to eight percent for Abu Dhabi in the next two years as a base case. Dubai’s population is likely to reach three million by 2020, which will aid demand.

3. Tourism growth

With 20 million tourists expected by 2020, growth in the tourism sector will benefit real estate segments like hospitality and retail and will stabilize performance.

4. Tougher regulation

Protective measures enforced by the regulators including the implementation of a loan-to-value cap on mortgages has reduced the risk of default. Measures like mandatory use of escrow accounts to be released only when construction is completed, as well as a new credit bureau to monitor personal debts will help banks and financial institutions assess mortgage-lending risk more accurately.

5. Positive geopolitical developments

Last, but not the least, positive geopolitical developments including the stabilization of the political situation in Russia and Ukraine, a rebound in the ruble and the lifting of US sanctions on Iran could support the real estate market.

S&P believes that the developers/issuers it rates will not need potential governmental extraordinary support unlike in 2009 and could absorb a ten percent to 20 percent drop in residential sales prices in Dubai because they are better armed in terms of revenue predictability and mix, product mix and balance sheets.

“We have run alternative scenarios where market conditions would deteriorate further than we currently anticipate, with average selling prices dropping 30 percent and interest rates doubling. Even under these harsh conditions, the ratings impact on GCC issuers would likely remain limited over the next 12-24 months as the current backlog and presales support cash flow,” S&P said.