Dubai Debt Freeze to Hit Property Recovery

By STEFANIA BIANCHI DUBAI -- Dubai's fragile real-estate market could suffer another collapse in prices after the city-state asked for a standstill on Dubai World's debt and its struggling real-estate unit Nakheel. "Should they effectively default, it can become one of the biggest sovereign defaults since the Argentinean crisis," said Marina Akopian, partner at HEXAM Capital, which manages about $440 million in emerging markets. "It will certainly have a very negative impact on the Dubai property market and I suspect on property markets globally." Dubai's decision to seek a six-month reprieve on the debts of Dubai World, which has liabilities of almost $60 billion, spooked markets in Asia and Europe amid concern that major international banks are heavily exposed. But the restructuring of Dubai World and its subsidiaries could also undermine confidence in the sheikdom's nascent property recovery. An estimated 50% has been wiped off the average price of real estate in the emirate since its peak. But in recent months, prices have shown signs of stabilization -- and even modest recovery. Property consultancy Colliers International earlier this month reported the first increase in prices for residential property since the market started plummeting late last year. Prices for residential property at developments open to foreign purchasers climbed by 7% in the third quarter, it said. At the heart of Dubai World's problems is Nakheel. The developer borrowed billions to build grandiose projects such as Palm Islands. Its closely watched $3.52 billion Islamic bond due in December has been a focal point for whether Dubai can pay its debts. "The Dubai World announcement could play into investor psyche," said Saud Masud, senior real estate analyst at UBS AG. "It sends a strong message to people that Dubai isn't out of the woods yet." Earlier this month, UBS said Dubai property prices could drop a further 30% over the next 18 months and may take at least 10 years to recover to peak levels. Mr. Masud said although the bank is unlikely to change its estimate for the drop in prices, the further fall may happen sooner than anticipated. "This type of crisis brings fundamental weaknesses to the surface faster. This could play out in the next six months or so," he said. UBS said one of the biggest concerns for Dubai real estate is the "funding gap" to finish properties that are already started and on which investors are defaulting. The bank estimates that $11 billion is needed to complete an expected 40,000 residential units by the end of 2010. Eric Swats, head of asset management at Dubai-based Rasmala Investments, said liquidity, which had started to return to the property market, will come under pressure as banks based in the United Arab Emirates try to limit their exposure to Dubai World. "They are going to have to take quite a big haircut because of the loans they provided to Dubai World and Nakheel," he said. "As a result, they are likely to be less able to make mortgages and other types of funding." As well as the uncertainty surrounding Dubai World and its entities, the standstill could also affect other listed developers such as Emaar Properties PJSC, the U.A.E.'s largest, Union Properties PJSC and Deyaar Development PJSC. "I continue to believe that I don't see Nakheel as a standalone entity in the long run," said UBS' Masud. Dubai World's move also appears to have affected the sentiment of foreign property buyers who helped fuel the boom. "I believed all the PR and hype that Abu Dhabi was looking after Dubai," said one Nakheel investor with two properties in the emirate who declined to be named. The 38-year old British investor, who paid close to $200,000 for an apartment in Nakheel's Discovery Gardens development and $50,000 for a retail outlet at Dubai's International City, said he's losing about $2000 a month as the shop stands empty. "I'm being hit from all sides," he said. Write to Stefania Bianchi at stefania.bianchi@dowjones.com