70 pct price falls loom for UAE real estate

The main drivers for the downgrade are seen as the massive oversupply of properties, expected price falls of up to 70% and prospects of widespread defaults.

Property prices in Dubai have nosedived since September 2008, when the effects of the US-triggered world financial crisis and falling crude prices caught up with the property boom in Persian Gulf sheikhdoms.

The UBS research note, released on Tuesday, goes on to say: "We believe the recent run up in equities with positive global market sentiment, U.A.E. government bailout as a backdrop is unsustainable,… We don't yet see fundamentals improving, hence we view overall systematic risk as mispriced."

With many of the migrant workers and experts leaving the emirates due to rocketing unemployment, exploitation and maltreatment, the UBS report foresees a population drop of up to 10%, further reducing demand for residential properties leading to a sector vacancy rate of up to 30% by the end of 2010.

As a result, the UBS report forecasts the average house price to fall to as much as 500 UAE dirhams ($136.1) per square foot ($1465 per square meter) from a peak of AED1850 ($503.6) in the fourth quarter of 2008.

And the worst may be yet to come, the Swiss investment bank believes. Its note says: "In our view we are still in relatively early stages of the property down cycle in the U.A.E.,… We believe risk-reward profiles are not yet compelling for investors to consider market reentry hence continued price declines are expected."

According to UBS, although property prices have already fallen by an average of 25% to about AED1400 ($381.1) per square foot ($4,102.1 per square meter), the spiral is likely to continue.

"In our view we are still in relatively early stages of the property down cycle in the UAE," the research note said. "We believe risk-reward profiles are not yet compelling for investors to consider market reentry hence continued price declines are expected."