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February 2010

News Letter - 10th February 2010

The number of voices we hear questioning the real extent of Dubai’s debt is increasing – a total of $120Bn (including the $22Bn which is being re-scheduled) has been mentioned –, as is the frequency with which the question is raised. We will “keep our ears to the ground” and our readership informed of developments as they happen!

Figures published in the last week for 2009 showed an increase in hotel guest numbers in the UAE of approximately 2.5%: thereby bucking the international trend of falling tourism. In the last issue of our Newsletter we reported a massive 31% drop in revenue per available hotel room in Dubai and that is accounted for by massive room discounts. The two sets of figures do not in our opinion support each other. If tourism is at the high indicated why would hotels drop their room rates? Dubai has never been a benevolent society – and it certainly hasn’t started being so – however hotel room rates have definitely sustained a massive drop.

The Dubai Financial Market (DFM) started the week with a slight fall and continues ‘south’. Since the start of the year DFM has lost 11.8% of its value. It is expected falls will continue as investors continue to take whatever gains they can whenever the market shows any small recoveries. The nervousness is likely to continue due to the uncertainty of the Dubai World debt crisis: the outcome of which is not expected to be finalised until May. It really should be clarified without delay: hopefully this would stabilise the markets. One can’t help but wonder if the crisis is more serious than anyone even imagines?

Union Properties – a major property developer in the UAE – has reached an agreement to re-schedule approx $1.5Bn of debt, mainly brought about by a lack of liquidity within the company. Information on this subject is sparse but we expect to continue hearing more on this and other property related woes. Union Properties are the owners of the new Ritz Carlton hotel and they have been quoted as saying this property could be for sale at a price in the region of $1.5Bn. Like many property companies in Dubai UP are suffering from a lack of liquidity. They have a debt mountain of around Dh6.5bn ($1.8Bn) with loans due to start paying back late 2010 / early 2011.

Office rents in Dubai are reported to have plummeted more than 50% during 2009; and with a great deal of additional space due to be ready for occupancy in 2010 further rent reductions must be expected. There is a similar situation within the residential rental market: much property stands empty and rental accommodation available for immediate occupancy is advertised on every street and many individual buildings.

Damac Properties – another large Dubai property company – has filed a motion to stop an investors lawsuit being heard in the Dubai International Financial Centre court and has moved to strike the case entirely. This is a case brought by a German investor against the Company for alleged breaches of contracts in the form of delays, misrepresentation of properties, fraud and improper use of funds and various other claims. Over the past two years probably everyone in Dubai has heard of such instances. Instances where payments have been made – for a property in an off-plan development which have called for regular payments against promises of the property being ready by a certain date and to a certain standard – only to find the work has not been started and delays of one to two years (and even more) have become the norm. This has left many ordinary people in a ‘catch 22’ situation. Does one continue with regular payments and risk not having a property at all; or does one stop payments and loose all monies paid to date and possibly be in breach of contract. It would be a pity if this case is stricken and not upheld. On the other hand if it goes forward it could lead to an avalanche of claims. If allowed to proceed it would, in the long run, be a significant step forward in cleaning up the property markets here. 

Some good news! It has been announced that a new oil field – Al Jalila – has just been discovered off the Dubai coast and is expected to be operational in 2011. The location is approx 70km east of the present small operational field of Rashid. Dubai’s current oil reserves are estimated at approx 4bm barrels – very small compared to those of Abu Dhabi

The tanker rate has slipped back significantly and layups at Fujairah appear to be increasing, although some of the layups are in the form of crude storage. The price of crude oil is lying in the region of $70 - $72 per barrel with very little movement over this last week. Kuwait has recently announced a massive surplus of $24Bm on its current financial year (ends March 31st) due to the setting of its budget at a level reflecting a crude oil price at a modest $35 per barrel when actual average price has been in the region of $70 per barrel. It is expected Saudi Arabia will have a proportional surplus in its budget. Kuwait is the 5th largest producer in OPEC.