Dubai real estate is hot again—maybe too hot: IMF
The International Monetary Fund (IMF) has warned of a return of overexuberance in Dubai's real estate market, recommending measures to prevent a replay of the spectacular bust in 2008.
"The pace of recovery in some segments of the real estate market and a number of announcements since late 2012 of new mega projects in real estate and tourism warrant a cautious approach to policy making," the IMF said in a statement late Tuesday following a consultation visit to the United Arab Emirates.
Dubai property prices have rallied substantially over the past year. Data for May from property consultants Cluttons showed villas and mid-range apartment prices had risen by more than 45 percent year-on-year in May.
The IMF suggested a hike in real estate-related fees, which would reign in speculative activity while supporting welcomed fiscal consolidation efforts.
(Read more: Africa Has Greater Potential Than India: Stanchart)
"The current practice of pre-funding projects based on blueprints invites public speculation and should be stopped. Real estate developers should be required by RERA (Real Estate Regulatory Agency) to put up equity of 30-40 percent before seeking external funding," Nasser Saidi, president of Nasser Saidi and Associates, told CNBC.
Previous attempts to dampen price momentum turned into a tug-of-war between commercial banks fretting about losing business, and the Central Bank. Officials last week requested an update on mortgage cap plans for residential lending.
Dubai's economic recovery remains strong, with the IMF forecasting expansion to reach 3.1 in 2013 and 3.6 percent in 2014. Several factors, such as high oil prices and Arab Spring-driven capital inflows, have proven especially supportive.
"Generating growth in the UAE isn't a problem. Ensuring that the pace of expansion is sustainable and the kind of growth being generated is healthy is much more challenging and will be the real test of what lessons policy makers learned from the 2008 bust," Simon Williams, chief economist for the Middle East and North Africa at HSBC, explained to CNBC.
Among the new "megaprojects" is Mohammed Bin Rashid City, a multi-billion dollar undertaking to be built in less than a decade. Highlights include 1,500 villas, a 350,000 square meter water park and the "largest crystal lagoon body of water in the world."
Many of these projects are developed to a large extent through sometimes highly indebted Government-Related Entities (GRE). And despite favorable external conditions, that is a source of concern.
"Dubai's GREs and banks are increasingly regaining access to external financing in an environment of high global liquidity and search for yield. Renewed large-scale external and domestic borrowing to finance ambitious real estate and tourism projects should be preempted to avoid setting off a new boom-bust cycle," the IMF cautioned.
Earlier this year, Standard Chartered identified $48 billion in debt maturities for the Emirate between 2014 and 2016.
(Read more: MSCI Ups Qatar and UAE to Emerging Market Status)
"There is an urgent need to develop local currency bond and Sukuk markets"—bonds that conform to principles of Islamic law—"which should be used to finance infrastructure and large real estate projects," Saidi added. "Active, well-functioning markets are better at assessing and pricing the risk of real estate developments and similar projects."
The Dubai Financial Market (DFM) and the Abu Dhabi Exchange (ADX) are currently among the best performing stock indices in the world, gaining 58 and 47.5 percent respectively so far this year.
In June, the fifth largest oil exporter was also reclassified by the MSCI to the Emerging Market index.
—By CNBC's Yousef Gamal El-Din