Financial sandstrom levels Dubai realty

Housing prices are falling for the first time in years, and shares are plummeting.

One major property developer has begun laying off staff, and another is reviewing its recruiting needs. Others are scaling back ambitious growth plans as financing for both companies and homebuyers freezes up.

"What happens in Dubai is very linked to the financial crisis," Markus Giebel, chief executive of Dubai-based builder Deyaar Development Co., said in an interview at his office overlooking the sprawling city's skyscrapers on Thursday. "There's actually no way to swim against the stream. If the stream goes left, you'd better swim with it."

Deyaar encapsulates the forces now buffeting Dubai's housing sector - one of the key drivers of this city's wealth in recent years.

In April, the company's former CEO and other officials were detained amid allegations of financial impropriety - an early salvo in a wider anti-corruption sweep. Analysts praised the crackdown, but it also rattled investors just as the global financial crisis was heating up.

Deyaar's stock has fallen sharply since. The company's shares ended the trading week Thursday at 78 fils (21 cents), down 74 percent from a year earlier.
Other real estate and banking shares are tumbling too. The Dubai Financial Market is down 25 percent this week alone.

At the same time, Dubai developers - like their counterparts in the West - are finding it harder to raise funds. Deyaar has shelved recently announced plans to raise more than $1 billion through the sale of Islamic bonds and is paring its international growth plans from about 10 countries to about three, Giebel said.

Others are also scrambling to cope with a change of fortunes that appears to have caught many by surprise. Only last month, the industry was busy unveiling audacious new projects, including a tower about two-thirds of a mile (one kilometer) high.

At least for now, the good times appear over.

After years of unrelenting growth, home prices on the secondary market in Dubai fell by 4 percent from September to October, according to a report this week by HSBC Holdings PLC. Prices for high-end "villas," typically stand-alone houses, are down 19 percent and face "protracted weakness" if lending rules remain tight, analysts at the bank said.

The report provides hard evidence for what real estate agents have been saying privately for weeks: many would-be buyers are spooked, and those that want to buy face a tough time getting mortgages.

Mary Nicola, an economist at Standard Chartered Bank in Dubai, said there are two main factors putting pressure on housing prices - tight credit markets and increasingly negative sentiment among investors globally.

As recently as a few months ago, speculators enticed by low borrowing rates and little money down helped drive the prices of unbuilt, or "off-plan," property up to the levels of finished developments, she said.

"Access to cheap credit led to an increase in borrowing and people were just going out and putting their assets in the property market," she said. "People were able to put minimum money down and then flipping the property within days."

Over time, bank deposits failed to keep up with the rapid credit growth, pressuring local lenders. At the same time, credit markets were tightening up around the globe.

Now the city is bracing for what some fear could be a painful correction. Morgan Stanley predicted in August prices will drop 10 percent by 2010 but could fall far more sharply in a more dire scenario.

Emaar Properties, the UAE's leading publicly traded developer, said Thursday it is reevaluating its recruitment policies to ensure they meet the company's long-term interests.

Also this week, privately held Damac Holding said it will cut 200 jobs, or 2.5 percent of its staff. The question now is whether the rest of the industry can adapt in time.

"It was an ever-growing market," Giebel said, suggesting that some developers may be unprepared to manage the shift to what could be a prolonged downturn.

"Whether all of the companies are prepared for something like this ... I don't know. But very seldom do you have leaders who are good at both the good times and the bad times," he said.