The unveiling of a raft of new projects in the UAE in recent months has raised questions about whether population and visitor growth is sufficient to soak up the extra supply.
From Mall of the World in Dubai, billed as the world’s largest retail destination, to Al Raha Beach East in Abu Dhabi, a mixed-use scheme to be built using reclaimed land, the number of new project announcements has reached its highest since before the 2009 financial crisis.
About US$212 billion in projects was under construction in the UAE, the research company Business Monitor International estimated in May.
Developers and officials argue the new schemes are needed to help meet surging demand from new residents and tourists, especially in Dubai. But economists worry about the risks attached to the scale of new development.
“We’ve seen a lot of new projects announced in Dubai over the past few months, but with very few details regarding timing and financing, so it is hard to tell how advanced the plans are and how likely they are to come to light,” said Farouk Soussa, the chief economist for the Middle East and North Africa at Citigroup. “Assuming they all do, then we consider the risk of oversupply in the market to be significant.”
A glut of projects was unveiled before 2009, but once the global downturn hit a credit freeze a loss of investor confidence led to many either being delayed or cancelled altogether. The ensuing meltdown prompted a debt crisis that slowed the economy.
This time, the government says the delivery of new projects will be closely monitored to match supply to demand. In Dubai, officials said in March the Dubai Urban Plan 2020 would be reviewed in light of the winning bid to host the World Expo 2020. The current plan envisages for the population to grow to between 2.8 and 3.2 million. The population reached 2.2 million people last year. It is also forecasting 25 million visitors, 70 per cent of which would be from abroad, over the course of the six-month event.
In Abu Dhabi, the Economic Vision 2030 and Urban Planning Vision 2030 report, compiled jointly by the Abu Dhabi Council for Economic Development and the Abu Dhabi Urban Planning Council, forecasts the emirate’s population to more than double to 2 million by 2020 from 930,000 in 2007. Tourist numbers will reach 4.9 million by 2020, more than double the 1.8 million level of 2007. But the population forecasts could change as officials review the estimates for the city of Abu Dhabi for the next five years, according to a person familiar with the matter. Nobody was available to comment from either Dubai Municipality, which is responsible for the Dubai Urban Plan 2020, or the Abu Dhabi Urban Planning Council.
Fitch Ratings, the credit ratings agency, is forecasting a population growth for the whole of the UAE of 6 per cent per year between now and 2016.
“There was a rapid growth up to 2009 and then population growth fell off quite dramatically for a few years. The population growth we are forecasting is up on previous years but we’re not at the same level as the pre-crisis era,” said Paul Gamble, the director of the sovereign group at Fitch.
Mr Gamble is also unsure about the positive effect on visitor numbers of the expo event.
“It’s unlikely to generate a massive new influx of tourists as the event may displace regular tourists,” he said. “There may be a modest gain in visitor numbers, but not huge.”
The IMF has repeatedly warned Dubai of the risks attached to building too many megaprojects too quickly. If not delivered prudently, these projects could exacerbate the risk of a real estate bubble, it warned in January. Residential prices in some areas of Dubai have already surpassed their previous peak reached in 2008. The pace of growth in prices slowed in the first quarter, partly as a result of government measures to try to curb speculation in the market. But concerns remain.
“The future direction of prices hinges on the level and pace of new supply coming to the market, which is significant in Dubai and less so in Abu Dhabi,” said Trevor Cullinan, the director of sovereign ratings at Standard & Poor’s, another credit rating agency.
There is also the risk of developers becoming saddled with fresh debt after only recently resolving debt burdens amassed in the aftermath of the 2009 crisis. Dubai’s government-related entities have about US$60bn in debt falling due between 2013 and 2017, estimated the IMF.