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Difficult years ahead for Dubai but recovery will follow

 Dubai Government officials have tried to sound upbeat in recent days, saying that the ‘bad times’ are now in the past, and that might be technically correct - with property and equity prices now so low that the additional possible downside is limited. Yet there are few in local business who do not see a hard road ahead.

Dubai Land Department figures showed some buyers getting extraordinary bargains last week with a total of 12 villas changing hands for an average of $286,000 each, and 535 apartments sold for an average price of $193,000. Agents talk of ‘distress selling’ and indeed at these price levels the downside is relatively low for buyers.

$10bn bond

However, the idea that the $10 billion raised from the UAE Central Bank in a government bond issue will restore the Dubai boom look wide of the mark. This is a substantial sum. But there are billions in loans to refinance, interest to pay on $80 billion in total debts and a lot of money now outstanding to contractors.

Dubai has the unenviable task of unwinding a real estate boom in the face of the worst global economic crisis since the 1930s. That is a major challenge even with the rich UAE federation as a lender of last resort.

There are difficult choices ahead. It is already clear that construction work is proceeding at full speed on The Palm Jumeirah, Downtown Dubai and the Burj Dubai and Business Bay. On many other sites across the city work has stopped, and it is hard to see how this will restart anytime soon.

Global trade has fallen off a cliff in the first quarter of 2009, and Dubai as the trading hub of the Middle East has clearly been affected.

The oil market also looks unreasonably strong given this collapse in trade and slumping economies around the globe. The International Energy Agency has warned that oil demand will drop by 2.4 million barrels per day in 2009, citing a growing consensus that economic recovery will be delayed until at least 2010.

Oil price squeeze

Collapsing oil demand does not square with an oil price of $50 a barrel, and a lower oil price will squeeze UAE hydrocarbon revenues further, dampening an already poor outlook.

That said a proactive government is always to praised, and Dubai has $10 billion to spend wisely on making sure key projects are completed and debts honored. But some faster action on creating a new home loan company would also be much appreciated, and put a floor under real estate prices.