The last few weeks have seen a substantial shift in the Dubai property market with various property developers in the region announcing a number of job losses. While officially the various companies involved are “aligning their employment needs to the market” there are rumours of financial distress in the sector. Nakheel is the latest development company in the region to announce substantial job cuts with over 500 people (around 15% of the workforce) made redundant over the last few days. So where does this leave the Dubai property market and the large number of property developers in the region?
The Dubai property market
The Dubai property market has been one of the more successful property markets of recent years attracting billions upon billions of dollars to the region and creating a whole local economy for the area. Initially there had been hopes that the market would be fairly insulated from the worldwide property downturn but the longer the situation went on it was inevitable that the Dubai property market would suffer to some degree.
In some ways the Dubai market suffered a double whammy because initially it was seen as something of a safe haven for international property investors as other markets turned down, as well as experiencing its own “overheated” situation. This meant that once the market did start to downturn we saw a number of safe haven investors leave as well as the original domestic and international property investors who had participated in the original expansion of the market.
Many observers believe the Dubai property market has suffered from the large number of long-term property developments which were started some time ago without obvious tenants and investors. There was also the situation whereby 2010 was quoted by many property experts as the crossover point between supply and demand in the region and a growing number of property investors had been looking to crystallise their profits before the “rush in 2010”.
The outlook for Dubai property developers
As the property market in Dubai started to slow we saw more and more property developers in the region announce delays and the suspension of projects with many international investors looking to retain their liquidity and put their own investment plans on hold. As the slowdown gathered pace we saw prices soften as developers looked to liquidate as many assets as possible to increase their own liquidity to see them through the downturn.
As some of the more extended Dubai property developers became more desperate for cash this put further pressure on prices and prompted more and more investors to wait on the sidelines. Even those property developers who suspended or delayed their future property developments are not immune from financial difficulties as they have still invested substantial funds into developments which they cannot sell as yet and will see no short term return.
The announcement of job cuts in the property development sector is a natural reaction to the slowdown in the property market and required to ensure the long-term viability of the companies in question. There will also have been some pressure for companies to reduce their overheads in order to retain the support of their bankers during what could be a difficult couple of years. Many of the smaller property operators in the region are literally fighting on a daily basis to remain in business in these difficult times.
The Dubai economy
The massive increase in the Dubai economy over the last few years has been a reflection of the growth in the property market which has attracted investors and businesses from around the world. However, as international businesses look to consolidate their positions we could see a number of recent entrants to the Dubai business world cut their exposure as a means of reducing their outgoing cash flow in order to survive the ongoing worldwide economic slowdown.
A reduction in the number of international companies operating in Dubai, or at best a reduction in their business levels, would see the local economy contract and the requirement for property for housing and business reduced. While there are all kinds of forecasts and comments floating around the market from various experts and observers there is no doubt that the long-term potential for Dubai is relatively unchanged and once the worldwide economy is on a more even keel interest is sure to return. In many ways the reduction in property prices and property development in the region could well be a blessing in disguise and avoid what could have been a potentially larger collapse had the market continued at the same pace for even another year.
Government controls
As the market was rising there were some adverse comments about the tight controls which the local Dubai authorities were implementing on the local property market. In the good times property investors and property developers prefer to have as much of a free hand as possible although the Dubai property market is very much different to more traditional markets. However, now that the area has been caught up in the worldwide economic slowdown a number of local authority led initiatives such as the freezing of mortgage liquidity and price caps may well have saved the market from further downside.
It is also rumoured that the local authorities have been very proactive in advising and assisting local property developers to ensure both their survival and the long-term future of the Dubai property market. The recent job losses are very unfortunate and will impact upon the local economy but this is very much a sign of the times and fallout from the economic slowdown.
Conclusion
While some of the pain being felt in the Dubai property market has caused concern among property developers and property investors, local authorities are heavily involved in ensuring the long-term viability of what is becoming one of the main property markets in the world. Their continued support on the upside and downside is starting to pay dividends and while not everybody is in favour of such controlled environments they do have their benefits.
It is highly likely that we will see more job cuts in Dubai in the short to medium term as much of the excess built-up over the recent boom times is carved away from the economy. The short-term pain should ensure both medium and long-term gain for a market which many still do not appreciate is still relatively new. Dubai property may have been THE property hotspot but that period may be coming to an end?