Dubai’s Debt Problems may have Far-Reaching Impact

The interconnected global economy could suffer further impairment as Dubai’s debt problems continue. It may send the already fragile US economy into a tottering state. Dubai World, which is the state-owned conglomerate, has said that it wishes to restructure the debt ratio. Dubai World has run up a liability of $59 billion already. It also plans to restructure the debt levels in subsidiary Nakheel.

Massachusetts based economist Tony Ciochetti said that the recession has had a global effect. With the economies of countries intertwined globally, the wave that hits one economy seriously impacts another. The news of Dubai World has cast serious doubt about the US recovery. What’s worse, the DJUSRE or Dow Jones U.S. Real Estate Index fell by 2.9 per cent. A banking analyst at Rochdale Securities in Florida, Richard Bove, says that the West Asian city may have to offload some esteemed properties at low prices.

That will further bring down the prices of commercial properties elsewhere in the world.

Dubai World has a few well-known properties in the US. This could send the property prices crashing further. The company has partnered with an operator of casinos MGM Mirage in the CityCenter project. The $8.5 billion project is expected to add 6,000 rooms to a gambling corridor in Las Vegas that is already full of unoccupied rooms.

Nakheel which has developed the palm shaped islands in Dubai also has a stake in Miami Beach Resort. There are several other hotels in its portfolio. Dubai World also controls retailer Barneys New York. Real Estate Econometrics chief economist Sam Chandan said that the crisis may have serious repercussion on the real estate scenario. Already commercial values have fallen from the peak of 2007. Moody’s analyst Nick Levidy says that commercial real estate prices would bottom out at 45 per cent below the peak levels. However, in a stress case, the fall could be even more – 65 per cent from the peak levels.

It may be noted that foreign investors too wanted to cash in on the plummeting real estate prices. They have been helped by availability of cheap credit. They also hoped that real estate prices would also climb after a certain time. The fluctuations in currency also added fire to their aspirations. As the US dollar lost value against other currencies, these foreign investors wanted to grab real estate at prices which were too high for foreign investors.

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