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GCC Economic Monthly

Source: NCB Capital

Of glass and concrete

The global real estate boom since the beginning of this decade and its subsequent sharp reversal lie at the core of the current economic turmoil. While the most acute crisis seems to be abating, the property market outlook in many key markets remains subdued because of a weak economy and credit constraints. By contrast, some emerging markets are showing renewed signs of bubbles. While recovery in the GCC should benefit from favorable fundamentals, systemic reforms are needed to ensure a solid future for the sector.

Real estate was the trigger of the global crisis. The housing boom was built on a combination of historically low interest rates and financial innovation such as securitization. After years of rapid growth, the eventual collapse in property prices quickly triggered a broader financial and economic crisis.

The sharpest correction appears to have passed but risks remain. While prices have begun to increase and inventories are coming down, some market segments, especially commercial real estate, remain oversupplied. In some cases, the recovery has been critically reliant on government stimulus measures of limited duration. By contrast, rapid credit growth in emerging markets such as China has led to renewed fears of bubbles.

An unusually sharp real estate correction seems to be reversing in the Gulf. Most markets are displaying signs of a tentative pickup, although Dubai will likely continue to be depressed by excess supply. We expect gradual price appreciation of some 20% over the next three years in Saudi Arabia which the new Mortgage Law would likely accelerate. The UAE market looks likely to be the slowest to recover with little prospect of sustained price appreciation before 2011.

Supported by population growth and economic diversification, the longer-term outlook for the GCC property market is very favorable. However, significant policy steps are required in a number of areas to create a long-term investment perspective and to curb speculative activity. The creation of a proper mortgage market and improving transparency are key steps in this regard.

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