The Reader

By Indranil Sen Gupta, Research Analyst

FORTY years earlier Dubai was a village on the edge of the Arabian Desert. Locals citizens lived in houses made out of mud shacks and the only vehicle for travel or moving was `The Ship of The Desert'.

After 40 years Dubai have created artificial islands full of luxury villas, the world's tallest tower, an underwater hotel and many more things which might make tails spin of one's eyes. Dubai is now the glittering crown of the Middle East. The gulf state is now being known for its tall skyscrapers, wall-to-wall shopping centers and luxury hotels.

But the whole glittering castle is of the boom in real estate was constructed on sand. Sand made of credit/borrowed money. But the leash of bubble got broken when the financial crisis broke off sending the prices of real estate to rock bottom levels.

Now prices in the real estate sector crashed where prices have fallen by up to 60%.

400 construction projects worth more than $300 billion have been shut down or postponed. The project cancelaation reveals demand havedried up and future outlook is also very bleak.

Even after the world economy tried to come out of the dark woods of recession the Dubai real estate sector struggles to survive. They are finding hard to find buyers even after prices came down by 60%.

Moreover the cost of living in Dubai has gone up like any thing.

All these will add the unemployment in Dubai. Most of the Asians are placed their and they might come back as Dubai have less to offer now and cost of living have goes up.

Foreigners have refused to buy the projects which have resulted further trap for inventory creation. This has resulted to default of payments of debt.

The fear in Western markets is that banks risk losing billions, which will damage their lending process and recovery of the economy too. Dubai World has a net exposure of debt of $59 billion of liabilities as of August. Where as the total debt of Dubai is $80 billion. So the Dubai World holds debt of 73.75% of Dubai's total debt. The Dubai Government announced that it is restructuring Dubai World, an investment company owned by the government, with immediate effect. It has asked creditors for a six-month standstill on its obligations until at least 30 May 2010. Nakheel, a real estate subsidiary of Dubai World, has a convertible bond due next months

The most of the fear of UK and US is that Dubai might go for sell of assets which they are holding in UK and US. If this breaks out then one might find cascading fall in the world equities.

The fall in the share prices of banks eroded £14 billion from the UK alone. As per Credit Suisse European banks could have an exposure of €40 billion (£36 billion) as loans to Dubai. Banks including HSBC and Royal Bank of Scotland have helped to finance Dubai's acquisitions and are now on the hook if the state cannot repay its debts.