US markets feeling the burn from Dubai

Dubai Debt & US Market

Dubai is in deep water. After six years of unsustainable growth, it would appear the emirate's towering economy was built on pillars of sand that are now crumbling under the immense pressure of $80 billion worth of debt.

People with a limited understanding of the business world could be forgiven for thinking that what happens in Dubai, almost 7000 miles from Wall Street, would have little affect on the US markets. But they're wrong.

The fragile US commerical property market could suffer badly as a result of the debt problems in Dubai. Tony Ciochetti, chairman of the Massachusetts Institute of Technology's Center for Real Estate, told PropertyWire, "With a global economy we are all attached at the hip financially in some way, shape or form.

"This downturn has had more of a global impact than any other."

The group's future remains uncertain

Dubai World, the group at the centre of the crisis, is a conglomerate with large holdings of commercial real estate and ports across the globe, among other assets. The government of Dubai, one of seven states that form the United Arab Emirates, owns 100 percent of the company, but has no obligation to back its debt.

This means that the group's future, along with all the projects it has invested in across the globe, hangs in the balance and this will undoubtedly have an impact on the US economy as shares slump, and our weakened greenback took a further battering. This in turn will damage the real estate market which has been showing signs of bottoming out in recent weeks.

Dubai World borrowed billions of dollars to acquire some of the most high-profile commercial developments in the United States in recent years, and it could be forced to sell them at a loss if the Persian Gulf conglomerate can't restructure its debts. Now analysts are pondering whether this will have a knock-on effect in the wider real estate market. The Dow Jones US Real Estate Index fell 2.9 percent on Friday, casting immediate doubt on the recovery in that country's real estate market.

"Dubai may have to unload very prestigious properties"

"Dubai may have to unload some very prestigious properties at distressed prices and this will drive the price of all commercial real estate lower," Richard Bove, banking analyst for Florida's Rochdale Securities said.

Dubai World is a partner with casino operator MGM Mirage in the $8.5 billion CityCentre project, which would add 6000 rooms to a Las Vegas Strip gambling corridor already saturated with unoccupied hotel rooms. As of yet it remains unclear if this project is under threat, but it doesn't look promising.

One of Dubai World's biggest units, Istithmar World, spearheaded the holding company's acquisition of the Mandarin Oriental, New York, for about $380 million in 2007, and a 50 percent stake in the Fontainebleau Miami Beach for about $375 million last year.

Devastating global recession

The Fontainebleau is struggling with financing woes of its own, stemming from a $660 million loan that was due in August. Contractors also claim the historic hotel owes them $60 million.

A lack of potential buyers would place many of its other projects in jeopardy if Dubai World are forced to offload them.

After a devastating global recession global markets have started to stabilize but they remain vulnerable. Recent announcement by the UAE suggest they may provide emergency funding to banks hit by risk of default. Instead of Abu Dhabi bailing out Dubai World directly the UAE has chosen to support the counter parties to its debt.

But time will tell whether this will be enough to prevent another global economic meltdown.

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