Global markets tumbled yesterday after Dubai World, the city-state's real estate vehicle, announced a debt moratorium for at least six months.
The government said it intends "to ask all providers of financing to Dubai World . . . to 'standstill' and extend maturities until at least 30 May 2010". The total debt of Dubai World amounts to USD59bn, and it is one small short-term component of that, falling due in December, which the company is unable to finance.
It has been no secret that Dubai's finances were under pressure as its property sector deflated sharply. According to a recent report from real estate advisory Firm Jones Lang LaSalle, Dubai's once-booming commercial property market has been forced to cut back rental prices significantly as vacancies increase. Property costs in Dubai declined in Q2 2009 averaged 25% after a 45% decline in Q1 2009.
A further decline in average rents is likely, due to increasing levels of new supply. By the end of 2011, 25 million square feet of additional office space is forecast to enter the market which will increase the vacancy rate and place further downward pressure on average rental rates. In Q2 2009, the vacancy rate increased to around 25% in the face of more than 2m square feet of additional space entering the market in a period of subdued leasing demand.
After the UAE invested USD10bn in Dubai’s five-year USD20bn bond programme earlier in the year, it had been hoped that the Emirate could ride out the crisis,
“This issuance will provide Dubai Government with the necessary liquidity to substitute the liquidity that has dried up globally in the last 12 months and accordingly meet all upcoming financial obligations. This programme will secure the necessary funding for Dubai to meet its financial obligations and continue its development programme,” said the Finance Ministry in a statement at the time.
The existence of such a concentration of empty and uncompleted real estate in one of the world's key investment locations will have a dampening effect on property values for a long time to come.
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