Fitch sees continued squeeze on property sector in Dubai

But some property consultants are sceptical of findings.

Dubai's property sector will remain under pressure at least until 2013 and investors might face more declines in property prices and rents, according to the ratings agency Fitch. As developers struggle to repay upcoming debt maturities in next year and in 2012, the "worst-case scenario" for the property sector is a double-dip contraction, Fitch Ratings said in a note released yesterday.

"Despite signs that conditions may be stabilising, as well as a recent round of debt restructurings and extensions, Fitch believes that the credit outlook for the sector remains negative. The sector is likely to see a period of stagnant growth at best, and a double-dip contraction at worst," said Bashar al Natoor, a director in Fitch's Dubai-based Europe, Middle East and Africa corporate team. Property prices in the emirate have fallen by about 55 per cent in the past two years, according to figures cited by Bloomberg News.

The sector could see further declines in prices and rents if there is not a significant improvement in market conditions, sizeable disposals or additional equity-raising and significant government support, Fitch said. "It is the worst-case scenario, but if there was to be a double-dip contraction, the drop in rental and purchase prices would be severe," Mr al Natoor told The National. "In our view, the injection of new equity by shareholders in real estate corporates is one of the main factors that could assist the situation."

But property consultants cast doubt over some of the warnings in the "pessimistic" report. "There hasn't been a massive offloading of assets elsewhere in the world. A lot of the banks have tried to work to rejig the loans. They have taken the view that 'if we do pull the rug on the loans, what are we going to do with the assets'?" said Andrew Charlesworth, the head of capital markets at the property consultancy Jones Lang LaSalle in the MENA region.

"In Dubai, there doesn't seem to be any indication that the banks are going to look at any wholesale foreclosures. My experience is that they will work with the developers to find a solution." Ian Albert, the regional director of the property firm Colliers International, agreed that mass defaults would be a "double-edged sword" for banks. "By defaulting them, what are [the banks] going to achieve? It's in their interest to come to the table [and negotiate with developers]," he said.

Assuming the refinancing deals go ahead, they will "take away the potential of a mass dumping of assets on the market", said Mr Charlesworth. "Then it boils down to one thing: rebuilding demand." Mr Charlesworth also said Dubai was made up of several property markets and their performances would vary. "[The Fitch report] seems quite pessimistic. We don't see the market being in a uniform decline; it's more of a two-tier market," he said.

Fitch said the other signs of the weakening market included increasing customer delinquencies, limited liquidity and a continued reliance on short-term maturities. Oversupply, limited mortgage availability and rising interest rates also "pose significant constraints". Higher risk premiums and the shortage of debt financing are also weighing heavily on the property sector. "Investors are becoming more demanding about knowing the structure of the underlying business," said Mr al Natoor.

While recent reports say that property selling prices are stabilising, some analysts have predicted that Dubai property prices face further declines of up to 40 per cent. A recent report by Asteco Property Management said the prices of apartments, villas and commercial properties in Dubai remained stable overall in the second quarter of this year compared with the first. The only areas to see a decrease in prices were The Meadows and The Springs districts, where there is a large supply of properties, the report said.

But an oversupply of units had seen rents in the emirate fall by 8 per cent over the past three months, the report said. Fitch said it expected Dubai rents to continue to decline for the next 12 to 18 months. Mr Albert said he agreed with the basic assertion made in the Fitch report. "They're saying that it's a long and perhaps slow road to recovery and I'd agree with that." @Email:[e-mail]