Liquidity squeeze causing panic and confusion in property market

Dubai: Questions over a lack of liquidity are dominating Dubai's property market, causing panic, confusion and misery to homeowners, prospective buyers and real estate businessmen.

Such concerns have seeped into Dubai's mentality in recent weeks from the financial turmoil spreading across the world.

Tight bank liquidity, speculation-driven price increases and reduced lending to individuals along with the recent wave of corruption investigations have all had a marked impact on a market previously unaffected by global events.

Flow of cash

"In our view, there is legitimate concern the Dubai market is enduring a liquidity squeeze, witnessing macro-economic and credit deterioration in most of the countries from where its expat buyers hail, maturing from a regulatory perspective and seeing the beginnings of a shakeout of small developers," said an analyst in yesterday's Citi Research real estate report.

All these elements combined are being negatively misinterpreted by the equity market.

The overall mood of the report is that Dubai's property market will see a slowdown, but not a collapse.

Dubai had once been the toast of the global property markets, with increasingly headline-grabbing developments and a seemingly uninterrupted flow of cash.

However, according to the report, liquidity is the biggest challenge Dubai faces today. "Liquidity among Gulf banks has dried up, bringing into focus the bias to real estate and construction of local bank loan portfolios," the report said.

The UAE central bank recently created a pool of Dh50 billion to provide much-needed liquidity to the desperately dry banks.

However, the banks are reluctant to disperse credit until they see evidence of sovereign wealth being reinvested in to the local economy, the report said.

The current liquidity squeeze at home is due in part to domestic banks having a larger loan book than deposit base and because foreign banks are keen to hang onto their capital.

With the squeeze comes the sharply reduced mortgage and lending facilities once easy to obtain.

"Mortgage penetration in Dubai is very low implying that the spectre of mass negative equity for mortgaged homeowners haunting developed real estate markets, may not apply," the report said. The report notes that Dubai investors have become too pessimistic.

It says "in the worst case scenario", if Dubai's liquidity squeeze continues, cash-rich Abu Dhabi has already showed willingness to help, via federal policy mechanisms.