Graduate student, MBA in Real Estate, Ozyegin University
Dubai is located on the southeast cost of the Persian Gulf and is one of the seven emirates of the United Arab Emirates (UAE). Being the most populous city in the UAE, Dubai has the second largest emirate in terms of land area and GDP, after Abu Dhabi. Dubai experienced a real estate boom after 2003, and with the impact of the 2007-2009 global crisis the property bubble continued until 2008. Several internal and external factors that caused the real estate boom in Dubai can be summarized as follows:
- Openness, Entrepreneurial Risk-Taking and Rapid Infrastructure Development: The UAE and Dubai had generally outperformed the rest of the Middle East and rapidly modernized in the past few decades. Dubai became one of the visible global cities because of the factors such as its strategic region, efficient government, openness to foreign cultures, and low taxes. However, the real estate boom gave rise to the thought that whether Dubai went far away from its core growth strategy.
- The Global Credit Boom of 2001-2008: Dubai encouraged to pursue a highly leverage growth strategy because of the massive growth of the global credit. The combination of low interest rates and the global credit boom gave rise to housing booms across OECD countries that have been synchronized (Kim and Renaud, 2009). In Dubai, real estate accounted for 23.3% of GDP.
- Opening of Dubai’s Real Estate Market to Foreign Ownership in May 2002: As of May 2002, investors of all nationalities could own residential and commercial properties in Dubai. A lot of people preferred to invest in Dubai because they knew that Dubai was politically stable, had a clean and efficient government and low taxes. In addition, some people prefer to invest in Dubai in order to recycle illegal funds. Due to this high demand, housing supply increased rapidly. In addition, there were large speculative investors in Dubai in 2006. Those contracts trigger the boom because firms started to do more units than market fundamentals would support.
- Strong Rise of Oil Prices Between 2002 and 2008: Economic development strategy and the real estate boom increased oil prices from $25 per barrel in 2002 to $147 per barrel on 2008. A major difference of this oil price boom has been the move away by Golf oil producers from the financial recycling of funds outside the GCC region through London and New York markets toward a massive push for internal structural development (Bertrand Renaud, 2012). Local investments in oil decrease the depth and duration of Dubai’s real estate bust.
- High Rate of In-Migration and Short Term Risk Taking: In-migration resulted in supply boom and increases in housing prices. After 2002 regulation, in-migration rate increased rapidly into the emirate. Between 2000 and 2008 there was a 6.3% annual growth rate in UAE and 7% in Dubai. A lot of young professionals started to live in Dubai. This could be one of the reasons for speculative behavior.
- Dubai’s Government-Related Real Estate Firms and the Distorting Effects of Guarantees: Because of the guarantees given to government-sponsored real estate firms, overinvestment and high-risk management decisions increased, which in turn caused overpricing in the market.
Dubai had a highly leveraged growth and all the factors summarized above caused significant problems in the city, especially after the global credit boom.
The authorities need to make investments in sectors other than real estate and formulate some restructuring reforms in the long term. As the restructuring progression in the real estate sector will take longer time, they can restructure the banking system in order to prevent another real estate boom. Dubai needs to have more transparent financial system and better governance.