Is Dubai experiencing a property bubble?

Last week, Dubai Holding announced that it would launch the world's biggest shopping mall, the 8-million-square-foot Mall of the World. But according to a recent article from Hotelier Middle East, this announcement has led to one analyst warning of "potential policymaking complacency" and risks of another real estate bubble.

The project, which is expected to contain the world's biggest indoor theme park, a new theater district and 100 new hotels with up to 20,000 rooms, would be built over 10 years and require $6.9 billion in financing. An estimated 50 percent of the money would be generated from Dubai Holding's own resources, with the rest due to come either from international debt markets, the sale of parts of the project or from pre-lease and partnership deals.

However, in an Emerging Markets update, Bank of America Merrill Lynch analyst Jean Michel Saliba said that his team was worried about "potential policymaking complacency and that such ambitious projects could lead to another boom-bust real estate cycle," particularly as there has not yet been major de-leveraging in the economy.

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The International Monetary Fund has also warned of the possibility of another property bubble developing in Dubai, where average prices increased by around 20 percent last year, according to Jones Lang LaSalle. Ratings agency Moody's also warned in research on Emaar Properties that that Dubai's pre-eminent property firm faces a potential risk due to 'exuberance' in the emirate's property market, which means that it faces the risk of overcapacity.

A recent STR report indicated that Dubai's hotel occupancy has been on a decline for two consecutive months, while ADR last month were the highest of any June since 2008. The increase was not able to fully offset the negative occupancy performance, and with more properties going to market, the emirate's hotel scene may see a notable shift.

But another recent STR study found that Dubai's hotel numbers are the most profitable in the world, which Filippo Sona, the head of hotels at Colliers International’s Dubai office, credits to the emirate's high food and beverage revenue compared with other markets in Europe and China. In an interview with The National, Sona said that Dubai’s average room rates and occupancies are high compared with the other locations, and therefore they have a high RevPAR as a starting point. “Also, in the region overhead costs, and payroll in particular, are far less than in other continents as we don’t have a tax system. Labour costs are low, too.”

David Shackleton, the COO of Dusit International, noted that year-round occupancy in Dubai ensures high profitability, as does high demand from business and leisure sectors, "reasonable" labor costs and the emirate's status as a global airport hub.