Dubai’s successful bid for the 2020 World Expo should generate activity and boost confidence across the emirate’s infrastructure, real estate and hospitality sectors over the next few years, according to Fitch Ratings.
“But the ambitious plans create longer-term risks, including that a surge in construction will throw off the balance of supply and demand after the expo,” the report added.
“Dubai is expecting 25 million visitors to the expo, which will drive major new construction projects across a 438-hectare site and significant infrastructure upgrades. This activity should continue to support rents and real estate prices in the run-up to the event, as well as boosting the construction sector. It will also boost demand in the hospitality sector, helping balance the likely revival of other tourist markets in the region as political stability improves.
“A key question during this period will be how the construction is funded. We expect government-related entities to be responsible for infrastructure improvements, while major developers will handle other projects such as hospitality facilities for visitors. Real estate developers have made progress in attracting new investment to the sector in 2013 and in repaying or refinancing upcoming maturities. We will examine the plans of Dubai and its leading real estate developers and assess their impact on ratings as they are announced.
However, the report said, the longer-term impact is uncertain. A well-managed expo could attract more businesses to the emirate’s free zones and raise its standing as a travel destination, which could create a long-term boost for the economy. However, the scale of the planned expansion also creates a significant risk that there will not be enough demand to support the new hotels, offices and retail space once the expo is finished.
“A big enough mismatch between supply and demand following the event would create the risk of another sharp drop in real estate prices, as happened in 2008 when property values fell by more than 50%. Prime real estate has recovered strongly since then and some estimates suggest prices have risen by up to 30% in 2013. However other sectors, including residential projects in secondary locations, have had limited recovery and are likely to remain challenged in the medium term.”