IMPACT OF CREDIT CRUNCH ON DUBAI'S REAL

Impact of Credit Crunch on Dubai's Real Estate market

Table of Contents

Executive Summary4

Chapter 1: Introduction6

Objective12

Research questions12

Methodology and data13

Outline of the study13

Chapter 2: Literature Review14

Core Questions of Concern34

Other Highlights34

Public Spaces/ Developments35

Chapter 3: Methodology54

Methodology and data54

Background54

Market Regulation55

Information flow and Price fluctions in Market56

Impact of Real Estate on Financial Institutions58

Bank Lending Implications59

Other Measures65

Regression Analysis depicting Valuation69

Limitations70

Findings71

Chapter 4: Conclusion73

References78

Weblinks81

Executive Summary

The primary objective of this study is to investigate whether there is a relationship between real estate sector and the affect of the credit crunch at the macroeconomic level of Dubai economy and at the microeconomic level of Dubai Financial Market. Empirical evidence has shown that such a relationship does exist in Dubai, at both the macro and microeconomic levels.

The real estate sector has been the prime driver of the financial sector. As the financial sector has been impact by the recent credit crunch it is crucial for the whole services sector of Dubai, the real estate sector shows to be even more leading sector. And since the whole economy of Dubai is being driven by those two vital sectors it is imperative to keep watching closely the course of developments in both sectors.

The distinctive characteristics of real estate market cause real estate prices to behave differently from the prices of other types of assets, such as shares. The fluctuations in real estate prices may happen not because of cyclical movements in economic fundamentals, but also as a result of the distinctive features of the real estate market. Therefore, it is common that the short run real estate prices diverge from their long-term trends.

Real estate over supply may happen as a result of inappropriate government policies that distort private incentives. For example, uncontrolled financial liberalization may lead to the emergence of new financial institutions that compete with existing lending institutions by offering loans on generous terms. As competition intensifies, and more financial resources become available for real estate, investment in real estate rises and eventually real estate prices will fall, after initial increase above their fundamental values.

Monitoring real estate prices is important for the stability of the banking system. This is because of the direct and the indirect exposure of the banks to real estate price volatility. The real estate prices and the banks' lending for residential and commercial real estate should be used as indicators for the soundness of the banking system. The real estate markets indicators that policymakers should look for are (i) real estate prices (ii) banks' residential real estate loans to their total loans (iii) banks' commercial real estate loans to their total loans.

Chapter 1: Introduction

Dubai is a city built on free trade, openness to foreign investment and good business practice. This is nothing new. In 1901 Sheikh Maktoum bin Hasher Al Maktoum established Dubai as a free port, abolished all tariffs and began a programme to persuade merchants from the Iranian city of Lingah to relocate to the Dubai Creek. A natural harbour the Creek was critical to ...