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Dubai Debt Drags Down Property Prices

July 10, 2009Article by Ray Withers

Dubai property investors already hit by a plunge in prices of more than 40% in the first quarter of this year received more dire news when a respected ratings agency warned the country may be burdened by huge debts that it may have trouble repaying.The Dubai royal family, who effectively run the Emirate state, were publicly snubbed by the agency downgrading the credit score of three government-run entities.

The slap in the face is a very public vote of no confidence in the willingness and ability of the royal family to pay debts stacking up as a result of the fall in Dubai property prices in the grip of recession.Standard & Poor’s Ratings Service (S&P) downgraded ratings for port operator DP World, the Jebel Ali Free Zone and Dubai Multi Commodities Centre Authority. The trio had been on credit watch since April.

“The rating actions reflect Standard & Poor’s reappraisal of the likelihood of extraordinary financial support by the Government of Dubai to ensure the timely repayment of their financial obligations,” the agency said.
S&P said the reappraisal also was the result of “increased uncertainty regarding the government’s willingness to provide such support” to Nakheel, the property developer who built Dubai’s manmade islands.

According to global housing price research, Dubai real estate is the second worst performing housing market in the recession coming in at 44th in the league table – second only to lowly Latvia.
The credit warning comes as Dubai is working to restore the image of the emirate as a playground for the rich and famous.

Dubai has already issued $10 billion in bonds to help firms but still has to cope with major debt problems.
S&P said the downgrades “reflect our view of the stand-alone credit profiles of the entities, which in certain instances, we consider to have deteriorated.”

The Dubai government is rearranging the deckchairs on the Titanic by trying to merge development companies to even out their balance sheets by setting off one firms assets against another’s debts – for instance Emaar Properties PJSC, which is behind the world’s tallest building in Dubai, is merging with three rival developers which are part of Dubai Holding, owned by the emirate’s ruler.

Emaar shares tumbled after the announcement, with S&P saying ratings for the firm are revised to ‘developing’, while Moody’s Investors Service, in a separate statement, said it placed Emaar on review for possible downgrade.Moody’s also downgraded Dubai Holding’s ratings to A3 from A2, and placed it on review for further downgrade.


Ray Withers

Ray has over 17 years’ experience in the international property market and bought his own first international property investment back in 2002. Aside from running Property Frontiers, Ray has been involved in residential, hotel, student and commercial property investment and development in both the UK and overseas and co-wrote "Where to Buy Property Abroad - An Investor's Guide". As Founder and Trustee of the Frontiers Foundation, Ray is directly involved with many of its projects to ensure they have a direct and tangible impact in individual communities across the globe. He is passionate about property, travelling, scouting out new opportunities and finding time to spend with his young family.
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