Investing in Property in Dubai – What Do the Defaults Mean?

dubai worldThe Dubai property market is in a mess right now, but the implications for the small investor are unclear. Although Dubai is world famous for owning some massive real estate developments in Dubai such as the Dubai Palm Island projects, it has also built up a $100 billion portfolio of assets in international property around the world and if Dubai world defaults on her debts, as is seeming more likely, international creditors wilkk be looking at their overseas assest as a way to recoup some losses. The fact is – it is illegal for foreigners to own land in Dubai, so the offshore properties, which include Turnberry golf resort, and numerous other holdings, including P&O, the British based shipping company, are going to look far more attractive. Prime real estate in the U.K. is the more appealing target for creditors than the desolate, undeveloped patch of desert that was earmarked for the Waterfront project near Dubai.

According to the bond prospectus, property consultant Jones Lang LaSalle valued the land at Nakheel’s Waterfront project at 15.5 billion U.A.E. dirhams ($4.2 billion) at the end of August 2006. This could rise to AED43.29 billion when the project is completed in 2018, the consultant said, according to the prospectus.

But analysts now say the real value of the land backing the bond could be 50% lower than the $4.2 billion figure in the prospectus. U.A.E. property laws, which prohibit foreigners owning land, could also prevent international creditors gaining title.

“We need to assess what the fair value of Nakheel’s collateral is today and if it suffices? If not, the bigger question is which other Dubai World assets can be claimed instead,” said Saud Masud, senior real estate analyst at UBS AG.

At the end of 2008, Nakheel had assets worth AED153 billion, against AED64.2 billion of liabilities, according to its financial statement. But a near 50% slump in property prices in Dubai over the past 12 months has hit the value of Nakheel’s assets and developments, which are mainly located in Dubai, putting Nakheel in an extremely tenuous position.

It seems to us as though this is a threat to persuade the Dubai government to go cap in hand to Abu Dhabi – but it may be that the price of losing some overseas assets will outweigh the probably penalties. Still – wealthy Muslims from Abu Dhabi still need somewhere to let their hair down away from rigorous religious rules. ;)

The staggering amount of Dubai property for sale, along with increased inventory put any small investors very much at risk in Dubai currently. The developers are aggressively pursuing any and all monies owed – almost regardless of whether the payment schedule calls for it or if they have upheld their end of the bargain and it could be years before this mess is sorted out.

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