Thursday, March 12, 2009

Downward Spiral

Subtitle: Gulf Region Real Estate in the Era of Cheap Oil.

That is the title of one of several reports just published by Knowledge@Wharton.

From the real estate report:
In explaining why the problem is magnified in the region, Verma points to three factors. "As the real estate sector unwinds, there are fewer jobs, and people are forced to leave because they cannot stay without a job. Fewer people means less demand for real estate and fewer shoppers at the mall. It becomes an obvious downward spiral."

In addition, he says, "bankruptcy and debt laws in Dubai are very harsh. It makes sense in markets [not characterized] by the wide adoption of credit for growth. However, so many buyers have [been using] credit without knowing the legal implications of default. Now that they know, people are leaving, which once again translates to fewer buyers, less shoppers -- again, a downward spiral."

Finally, he notes, "monetary policy is important. In the U.S., the government can print trillions of dollars and amortize over the largest economy in the world. They can slash interest rates to practically zero to reduce debt and the cost of servicing debt. In Dubai, they can't. That's why they need Abu Dhabi [to help]. They can't lower interest rates. In fact, interest rates are going up, further squeezing borrowers and stifling any remaining growth. This further increases [the number of] defaulters, again driving people out."
The overall report comes in four chapters:

A 'Downward Spiral': Gulf Region Real Estate in the Era of Cheap Oil

Kings of Cash: The Impact of the Global Financial Crisis on Sovereign Wealth Funds

Time for Transparency: What Will It Take to Improve Corporate Governance in the Middle East?

Dubai Media Deputy CEO Najla Al-Awadhi: Empowering Others through Information

Or go here to get an overview and the entire report, "The Middle East: Life After the Oil Bust" in one document.

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