Dubai model of property market for the region?

We were in Bahrain this week working on an upcoming special for Marketplace Middle East. The temperatures were searing hot, ranging from 39-44 centigrade as we covered nearly the entire island nation of just over one million Bahraini and expatriate residents.

My last visit to Bahrain was at the end of 2005 when many of the buildings were skeletons of what they are today. The World Trade Center with its three wind turbines providing a portion of its energy is the other anchor property within the burgeoning skyline.

While going from point-to-point for interviews and video shoots, there was a lot of give and take about where the region is going and this week’s stock market sell off triggered by a less than bullish property report from U.S. investment bank Morgan Stanley.

In a nutshell the report talks about a potential 10 per cent correction in Dubai property prices by 2010. At this juncture and due to demand in other markets which are playing an intense game of catch up, they don’t see this spreading to other Gulf and North African markets — although a contagion is not ruled out.

In terms of context, a 10 per cent fall is not severe and analysts I spoke with say it could be much greater. The retail market is up another 25 per cent already this year and was up 79 per cent since the start of 2007. The numbers are far more staggering over the past decade.

The real point is that there is now discussion about a top for the market. As business people and viewers of our programme know, there is always a soft-toned discussion about what will happen next, how frothy prices are and whether neighbouring countries are blindly following down the same path, not really knowing where that path may lead them.

I had that report on my mind and the subsequent market sell-off as I toured a housing development on the outskirts of Bahrain. Nearly a thousand villas are going up ranging from $1 million to $2 million dollars, pretty modest by Gulf standards, but nonetheless quite an ambitious planned community. It also struck me on this visit, (and it is not the first time) that it is always difficult to gauge classic supply and demand in a market where desert sands are vast and new housing stock can be added when growth warrants. In London for example, if one wants a prime property in West London, there is no extra land to build on. You either buy what is available or you don’t. As we have found out over the past year, London property is not a one-way bet only pointing upwards.

There is also some context missing. If a 10 per cent correction is all that is in the cards, then the downside risks are pretty low. I think the U.S. homeowners would have been pretty happy to walk away with that sort of decline at the start of the credit crisis.

Supply and demand in the Dubai model and for that matter in other Gulf States are complicated by governments holding much of the property stock themselves. Like a water tap, they can either hold back property development to prop up prices or they can let this cycle play out and let some of the excesses work their way out of the market.

Countries later in the cycle, such as Bahrain, are trying to gauge if this is the beginning of a real sell-off. If so, they need to do some of their own housekeeping on the project approval front. Most on the sands of Manama seem quite content where they are and instead want remain focused on keeping inflation at bay and getting workers trained up for the next wave of growth.

One said this report injected a “small hint of concern” but in a sector which has only known very prosperous times, a sneeze can feel like the beginning of a full blown cold.