Dubai’s Real Estate Market Is Back. Bubble Trouble?

A rise in asset prices is normally cause for celebration. In Dubai, however, a recent spike in real estate values is bringing back echoes of the emirate’s property-market crash four years ago and prompting growing concern about bubbles. The latest addition to this chorus of worry was the International Monetary Fund, which released its Article IV consultation on the U.A.E. this week. By the IMF’s reckoning, Dubai’s residential market is up 16% this year to the end of April. The real estate consultancy CBRE paints an even frothier picture, saying in a recent report on the second quarter that rents went up by more than 30% in a year. Even the lagging office sector was seeing a rebound, it said. “It’s too early to speak of a bubble now, but if prices increase at this pace, over time there’s certainly a risk that there would be a new bubble forming up,” Harald Finger, the IMF’s mission chief to the U.A.E., said during a conference call on Tuesday. Dubai’s government has already taken a cue from the real estate recovery, launching several major new developments in the past year. The largest so far is Mohammed Bin Rashid City, a sprawling master plan smack in the middle of Dubai that’s slated to house the world’s biggest shopping mall, surrounded by huge parks and lots of hotels. But the watchword now is restraint. In its Article IV report, the IMF recommends that the U.A.E. raise fees on real estate transactions if it looks like the rebound is getting out of hand. That, the IMF says, would give the government much-needed revenues to fix its fiscal position while also introducing a measure of calm into the market. Fees on transactions now are just 2%.

The IMF also recommends that the U.A.E.’s central bank quickly enact proposed new caps on mortgage lending loan-to-value ratios and on banks’ exposures to the government-owned companies that played a central role in the previous real-estate boom. The hope is that these measures will provide an extra margin of bubble protection. What’s less clear, however, is whether Dubai is willing to play ball. The UAE Banks Federation, an industry body headed by the politically powerful Dubai banker Abdulaziz Al Ghurair, has been angling for a softening of the new central bank caps and extensions of time to comply with them. Meanwhile, government officials told the IMF that raising fees on property transactions “could affect the emirate’s competitiveness, and would thus likely only be considered in coordination with other emirates and the federal government.” Dubai officials told the IMF that the emirate had learned its lessons from the crisis in 2009, the report says, and that a boom-bust cycle was unlikely to come back because its new mega-projects will be built gradually over the medium- and long-term. That, at least, is something the IMF agrees with, recommending strict oversight of development priorities and borrowing. “The new megaprojects should be executed at a measured pace, and new risk-taking by [government-linked companies] should be avoided,” the IMF report says. But while things are starting to get better, Dubai is still trying to fix the fallout from its market tumble four years ago. A few of its companies are still in negotiations to restructure debt, and Sheikh Mohammed bin Rashid Al Maktoum, Dubai’s ruler, issued a decree this week establishing a committee to oversee the return of money to people who invested in projects that never got off the ground.