In case you were wondering why sterling might be suffering on the back of the Dubai story, Reuters reports on Thursday:
LONDON, Nov 26 (Reuters) – The Dubai government could be forced to hold a firesale of its international real estate if creditors to two of its flagship companies reject proposals to put near-term debt obligations on ice until May 2010.
International property advisers are bracing for a potential slew of instructions to revalue and sell trophy assets owned by Dubai World and its many property-owning units as the emirate struggles to shrink its $59 billion debt pile.
“We do expect the Dubai government to step up efforts to raise capital via real estate sales, and sales of their UK assets in particular,” James Lewis, a member of the Gulf capital markets team at property consultant Knight Frank told Reuters. Lewis said Dubai had a better chance of denting its massive financial liabilities if it raided its group portfolio, which comprises international landmarks such as the Grand Buildings close to London’s Trafalgar Square, the Mandarin Oriental hotel in New York and the Victoria & Albert Waterfront complex in Cape Town, South Africa.
“The simple supply and demand imbalance (in Dubai) is horrific, which begs the question of why you would want to buy commercial and residential property there if you couldn’t be sure of letting it,” Lewis said.
What’s more, they add:
Favourable dollar-sterling exchange rates could also encourage the Dubai government to offload more UK property in deals like that struck by its Istithmar unit, lender Eurohypo and property firm Great Portland Estates .
And here’s the cable chart:
In other words, if default is really on the cards, chances are Dubai World will have to start a major fire-sale of assets. Unluckily for the UK, the Middle East and the UAE have for a very long time viewed the British real-estate market as a safe-haven investment.
The FX analysts over at BNP Paribas happen to agree. As they wrote on Thursday:
What surprised us is that the market has not yet discussed why Dubai World run into problems and what Dubai tells us in respect of US and UK retail estate markets. Dubai World become overleveraged and stands for investment into non-productive real estate investments.
In this sense, there has been a misallocation of capital and with the real estate bubble bursting the capital invested in real estate no longer provides a yield.
Last week, we learnt that foreign investors have put about GBP3.8bln into UK commercial real estate since the start of this year. Investors like the cash flow from commercial real estate investments which is viewed as adjustable to inflation. However, this pro inflation trade does not consider the rising default risks of an over borrowed economy. This type of Sterling inflow will now be seriously challenged by the Dubai crisis and is the real reason for sterling weakness.
Related links:
“For the general purposes of the Dubai Financial Support Fund…” - FT Alphaville
“The Sun Never Sets on Dubai World.” Really? – FT Alphaville
Dubai World asks for debt ‘standstill’ – FT
