While shepherds build their lofts by night

In a surprise move Sheikh Mohammed announced a renaming of the tower. It will now be known as the Burj Khalifa, after the president of the United Arab Emirates and emir of Abu Dhabi, Sheikh Khalifa bin Zayed Al Nahayan. Whether this move is a truly charitable and gracious act in honour of a neighbouring ruler, or whether Abu Dhabi in fact demanded this ultimate price in return for last month’s timely bailout of $10billion I guess we will never know. But if it is the latter then Dubai would have been in no place to argue. But what a price to pay!

Up to now the true height of the tower was kept secret – not that anyone in the world is in any rush right now to out-build them – and not that any reasonably skilled surveyor with good trigonometry skills couldn’t calculate it without too much bother. Unofficially the figure of 818 metres was being mentioned across the web. Today however the actual height has been released at 828m (2,716ft) which makes it 320m higher than its nearest rival, the Taipei 101.

So for those who have missed the stats….where have you been!! But seriously though here they are:

This truly is a monument to the ingenuity and optimism of human beings, though undoubtedly it also epitomizes the folly of extreme human pride and ego. Personally I think its pretty cool and who knows, if I had that much money perhaps I’d have wanted to build one too. Congrats to you Sheikh Mohammed on the achievement. A pity you had to give away the name.

Of course we can’t condone the use of virtual slave labour to get the job done – but hey aren’t all truly great monuments built on the back of slaves?! The Pyramids, the Taj Mahal, and now the Burj Khalifa.

Does this new kid on the block (or should that be new Block on the Block) herald a turn around in the fortunes of Dubai? Well after the 50% price dive of 2009 the omens remain poor for the time being. Remember that 90% of the population are expats and half of the whole work force is real-estate and construction based (according to Mr Saud Masud, an analyst at UBS Dubai.)

As outflows of these expats continue, he estimates a drop of 10% in Dubai’s population over the 2 years from start 2009 to end 2010. This will decrease the demand for housing, while over the same period new handovers of approx 40,000 new units will accentuate the over supply problem. The excess supply of housing could hit 30% by the end of 2010.

This does not bode well in the near term for any recovery in property values, although long term Dubai will no doubt survive as an important business hub in the Middle East, albeit one that’s had its wings clipped and some lessons in humility doled out by the spadeful.

On another note we came across an interesting subject about the Islamic view about building extravagantly on this website: http://islamqa.com/en/ref/101903

The author says:

“The Muslim should not make this world his main concern, and poverty is not what the Prophet (peace and blessings of Allah be upon him) feared for his followers, rather he feared that the world would open up to them and they would compete in worldly gain, for that could lead to their doom and destruction.”

It was narrated that ‘Amr ibn ‘Awf (may Allah be pleased with him) said: The Prophet (peace and blessings of Allah be upon him) said: “By Allah, it is not poverty that I fear for you, rather what I fear for you is that worldly riches may be given to you as they were given to those who came before you, and you will compete for them with one another as they competed with one another, and you will be destroyed as they were destroyed.”
Narrated by al-Bukhaari (2988) and Muslim (2961).

He goes on to say:

“We know that there is no reward in building a house per se, otherwise the rich who build palaces for millions would occupy the highest degrees of Paradise! The dinar that a Muslim spends on building his house will not be reciprocated in the Hereafter. A man may be free of sin, and if he is rewarded it will be only for his intention in protecting his family and household from indignity, and sheltering them in a house that protects their dignity and honour. But there is no reward merely for building a house, and he may be exposed to sin and punishment if he is extravagant and his aim is to show off and boast.”

The author also quotes the following from the sayings of The Prophet (peace and blessings of Allah be upon him):

It is proven in Saheeh Muslim in the hadeeth of ‘Umar ibn al-Khattaab (may Allaah have mercy on him) that when Angel Jibreel (Gabriel) asked the Prophet (peace and blessings of Allah be upon him) about the signs of the Day of Judgment approaching he said : “When you see the barefoot, naked, destitute shepherds competing in the construction of lofty buildings.” Ibn Rajab said, commenting on this hadeeth: What is meant is that the lowest of the people will become their leaders, and their wealth will increase, until they compete in building tall buildings, and adorning them. Al-Nawawi mentioned the same meaning in Sharh Saheeh Muslim, where he discussed this hadeeth.

Trust your instincts

How time flies!

With 2009 on the wane, we may all be wondering if it is safe yet to try our luck in Dubai.

Let me just say though that actually, I am not wondering at all! Personally I still wouldn’t touch it with a bargepole, for numerous reasons including, above all, that I cannot trust hundreds of thousands of pounds of my kids’ inheritence to developers who are not subject to hard and fast rules, where the regime is happy to absorb foreign cash but fears giving residency rights in return, and where the local media can’t be trusted to give objective facts about the state of affairs.

I recently picked up an interesting book at my local bookstore, called Blink: The Power of Thinking Without Thinking
in which the author, Malcolm Gladwell, basically says that when faced with a situation where you need to decide a course of action sometimes over analysing the problem actually distracts logical thought and does not necessarily lead to the correct decision. He reckons that if we simply learn to rely more on our intuition, and on the first impression that we get in the initial blink of an eye, the outcome is often a better one. This first impression is the culmination of lots of subconsious analysis which our brain is processing and then trying to communicate over to our conscious mind, if only we would listen. It’s certainly an interesting read, and here is a linkif you are interested.

The point I am actually trying to make is that when it comes to investing in Dubai, there is so much misinformation and vested interests’ out there that trying to judge a course of action based on the advice of the professionals is fraught with danger right now. But when I consider my gut instinct and “blink thinking”, the answer I get is “No way!” – So I think I will go with that for the moment.

There are already some real estate cronies who are calling the bottom of the market, for example in an interview on AMEinfo.com, Rohan Marwaha, the MD of Cityscape (that run the annual Cityscape Dubai Property Exhibition which happened last week) was trying to put a brave face on the low turnout and spartan exhibition stands at this year’s show. Apparently the foreign media’s negative portrayal has been overblown and everything is now fairly stable and long term growth prospects look promising. Err.. why am I not convinced?

Also Landmark Advisory are reported here as stating that villa prices may have hit their bottom. I know plenty of misinformed investors nursing massive losses that would certainly “hit the bottom” of such analysts with a big stick if they ever caught them!

To be fair to ArabianBusiness.com though, I thought their coverage of the CityScape Exhibition was balanced enough, see here. They report that numbers at the Expo are well, well down and that Reuters are saying that prices will probably go down another 10% by the end of 2009 and only have a 20% chance of picking up before 2011.

Although the guarded sentiment from Reuters is more believable, one still has to wonder – how do they make up these predictions??! It’s all totally unproveable. I could make up similar numbers about the likelihood of further falls or recovery and have just as much chance of being correct. So what if they are market analsysts and property professionals. None of these guys predicted the global credit crunch did they? They didn’t know what was just around the corner, even when it was “just around the corner”. So how would they know if another blow was near. Or for that matter if another boom was about to happen. They simply don’t know.

That’s why I would rather trust my own Blink instinct, based on which I can’t see myself investing in any immature country for some years yet. I would rather buy a house here in the UK or over in the States where at least the laws are not going to change wildly overnight. Even in those countries though any investment I make will be based on my own private research and reasoning. Avoid professional financial advisors like the plague – that’s my motto. When you are following the same advice as thousands of other people, then you are simply part of the herd and the only time that’s not dangerous is when you are at the front of the herd and you look back and can see thousands more behind you. If you are anywhere near the back, then you risk being the idiot left holding the overvalued asset when the bubble bursts (apologies to any such idiots reading this – no insult intended – but I hope you have learnt your lesson and never repeat it for the rest of your life – in which case it will have been a lesson well worth paying for.)

If you really want to know what my private thoughts are on the UK I could tell you, as long as you promise not to listen to me!

Seriously though, my colleagues and I are not yet in the mood to buy anything, unless it is ready to rent out from the start, i.e. will not soak up extra capital for refurbishing etc. and also it must be giving a healthy yield. There is not much out there at present that fits the bill. Even though the news is reporting stabilising prices and even some price rises, we are highly suspicious of these rises since they are based on certain factors which could unravel at any time. A lot of the price strength is stemming from a constriction of supply.

Estate agents are reporting that new instructions are well down. This is because people who would otherwise like to sell their houses currently cannot do so because reduced equity from their property and restricted mortgage supply for their next purchase means getting their next house after selling their current one may prove either difficult or impossible. Banks nowadays need solid proof of income, an excellent credit rating and up to 40% deposits. This is a tall order for many who would otherwise love to move on to the next rung of the property ladder. Luckily for these people the historically low interest rates mean that at least they can still afford their current diggs for the time being.

But we’re not falling for this rally in house prices. Its not based on solid foundations. The economy is in the doldrums, unemployment is high, negative sentiment abounds and people have taken on a siege mentality. It is a time of thrift. Also credit remains very tight so we can’t see how this rally can be sustained for very long. Ultimately, all it’s going to take is a slight shock, such as another wave of unemployment, or a hike in interest rates, or a tranche of people coming off fixed rates on to higher variable rates and the house price rollercoaster could again turn downward. We won’t want to buy good ‘n’ proper until some time well into 2010 or even 2011, when we expect to see the true bottom of the market.

The same sort of reasoning applies to Dubai although of course with a global clientele the factors will be more complex. At present we cannot see why prices would want to resume an upward trend in Dubai, since worldwide a ‘flight-to-safety’ mentality is still prevalent. Additional local factors are also going to keep the market there depressed, among which an important one is supply far outstripping demand. A recent report by Colliers reveals that there will be around 340,000 residential units in Dubai by the end of the year, of which 25% are currently lying empty. On top of that another 34,300 units are being completed in Dubai over the next two years! Yikes!

Things are worse still in the commercial property sector. Colliers estimates that office capacity will increase from three million to six million sq m by 2011, and those projections are based just on confirmed projects, so it could actually be greater. It added that the office market had been the worst hit by the global economic slowdown. They said that average Dubai office prices were down 58 percent in the third quarter of this year compared to the same period last year, while office rents fell 44 percent in the same period.

Dubai retail rents had fallen 18 percent in the past year based on new and renewed rents, the report also added.

I could go on to list the other factors, such as restricted global credit supply, growing competition from neighbouring gulf/middle east business locations, jitters over residency rights, mismatching of housing type to income level of potential residents, etc etc. However the basic conclusion, the ‘gut instinct’ view that we are getting is still one that tells us to sit back, relax and “Watch & Wait”. Keep watching, keep waiting. When the time comes and you feel your bowels talking to you, telling you that things have got as bad as they could and now the only possible way is up, then either go and see a doctor asap, or maybe go forth and seek your fortune. But no matter what you do, trust your guts before you trust your advisor!

A metaphor for Dubai's property market

Yes we’ve been getting informal stories and anecdotes from friends and colleagues about how Dubai remains in dire straits and how the doom and gloom is so palpable. Thousands of migrant workers have gone home. Now the cottage industries – the food stalls, the visa advisors, the cheap-end rag trade, the sim card sellers – that catered to these workers are feeling the pinch. The small time bosses who would hire from this pool of low paid workers now find it increasingly difficult to acquire their dogsbodies. All the local businesses are having to compete like never before, over a dwindling market place. It has literally become dog eat dog according to our pal Suleiman.

And what of the go-getting emirate’s finest creation, its real estate market?

Now last time we looked, there were reports of 30-50% falls which was bad enough, though in our humble opinion nowhere near enough to ‘correct’ the foolishness in the market. I mean the really foolish often need some good hard slaps to come round to their senses, and 30% was nowhere near strong enough.

So imagine our surprise (the kind of surprise when you finally get to read something refreshingly honest) when PropertyWire published an article on 31st March in which Mohammed Khan, Managing Director of New World Capital, a Dubai-based real estate brokerage, reported that “We have seen prices plummet across Dubai’s property sector by 50 to 70% to the level of 2005. We expect the plunge to continue for the next six to eight months to bring prices down to their original level five years ago.”

Now that is a good firm slap across the cheek of the property profiteers!

Further snippets from the article include:

“…..brokers said that the current outlook for the property market was starker than the latest study by investment bank EFG-Hermes, which said on Saturday 28th March 2009 that the Dubai market had entered a period of correction after a sustained period of buoyant activity. The bank forecast overall price declines of 50 to 60% from peak prices in 2008.”

“….A drop in residential as well as commercial rents is also evident, brokers said. The slide has been more pronounced in areas of New Dubai, where rents have fallen by up to 40%. A. Najeeb, Sales Manager of MS International Property, said apartment rents in the more established area of Al Ghusais were also declining fast.”

“….More drastic has been the decline in commercial property rents, almost 60% across Dubai. ‘We are expecting further rent drop by May or June when a lot of expatriate families will be going back,’ Najeeb added. ”

Slumdogs and Millionaires

BBC's hard hitting investigative journalism series

Commentators have said that dubai’s boom has been built on the back of slave labour. Where the rich few were making ever more millions, it was the poor construction workers that were suffering with poor pay, poor working conditions, lack of proper human rights and substandard living arrangements.

Well those of you who are able to watch the UK’s BBC1 channel will be able to make your own minds up on this issue.

On this coming Monday 6th April at 8.30pm, BBC1’s Panorama programme will be reporting on Dubai’s underdog migrant working class in a special programme called “Slumdogs and Millionaires”. This should make interesting viewing. You can get the background spiel here.

I will post a review of the programme next week.

Poetic licence

Two vast and trunkless legs of stone

I present it here as an allegory of the situation in Dubai, and as a general reminder of how we are all transient beings and no matter what we achieve or how high we rise, one day we will fade into the fog of time.

OZYMANDIAS
I met a traveller from an antique land
Who said: Two vast and trunkless legs of stone
Stand in the desert. Near them on the sand,
Half sunk, a shatter’d visage lies, whose frown
And wrinkled lip and sneer of cold command
Tell that its sculptor well those passions read
Which yet survive, stamp’d on these lifeless things,
The hand that mock’d them and the heart that fed.
And on the pedestal these words appear:
“My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!”
Nothing beside remains: round the decay
Of that colossal wreck, boundless and bare,
The lone and level sands stretch far away.

We don’t pretend to be literary geniuses (far from it) but we don’t mind sharing our basic understanding of the piece with you, dear reader!

We note how the poet starts very vaguely. He didn’t experience this broken statue himself, but heard it from a traveller. Hence we the readers are getting the picture 3rd hand.

Then we start to find out a few details – the legs, the head. After that the poet starts to speculate on the sculptor, who is one step further removed from us again – so now we are getting 4th hand information, i.e. the sculptor experienced the king, the traveller saw the sculptors work, the poet heard it from the traveller, and we are hearing it from the poet – this emphasises how far away this event is from us, both in time and space. Through the sculptor’s hand, we get some clues to what Ozymandias was like. He was cold and ruthless no doubt (with a ’sneer of cold command’). He ruled over his subjects with a mocking superiority (’the hand that mocked them’) yet at the same time he felt for their welfare (’the heart that fed’) – perhaps as pets?

So now the poet has built an image of what this king was like. Then we are told the bleak and stark message that has been left for future generations by this once mighty Pharoah. “Look on my works, ye Mighty, and despair,” he warns us.

Finally after this brief lucid picture of a past epoch, we are returned to our obscurity as nothing now remains except the ‘lone and level sands’ that ’stretch far away’.

Just imagine – this was written almost 200 years ago about a king who lived over 3000 years ago. Yet its message and warning still feel relevant in today’s day and age and we wonder – who are the mighty pharoahs of our time, that build their colossal monuments rising out of the sands? Perhaps they should leave a blank tablet at the base of their creations upon which one day warnings could be left for future generations…..

See also the following:

Guardian.co.uk: “As they did Ozymandias, the dunes will reclaim the soaring folly of Dubai”

Gawker.com: “Dubai Enters The Ozymandias Age”

“Encouraging signs for Dubai’s property sector” – Bradley Hope (The National)

“Cash boost for property firms” – Angela Giuffrida (The National)

“Dubai’s real estate industry ‘at low point’ “ – AME Info quoting interview with Ryan Mahoney

Exactly what planet are these people on?

Perhaps they need to build themselves one of those man-made off shore islands, call it ‘Mars’ and all relocate their offices to it.

All of the above reckon that the Dubai housing market is at, or is close to, it’s low point and that most likely the down trend will be reversing soon! When reading this stuff I wasn’t sure whether to laugh or cry! As proof they point to the recent $10bn bailout of Dubai by the UAE federal government (read as ‘Abu Dhabi’), much of which will most likely go to the govt backed construction companies that are finding it difficult to meet their debt obligations.

Just imagine a black hole which has opened up below Dubai. What the UAE is now proposing is to throw $10bn into that hole. They may as well say bye-bye and so-long to that cash, because its gonna vanish into that black hole. It will neither be seen ever again, nor will it make a blind bit of difference to the outcome for these companies. If I were them I’d take the money and get out of the property game and go dig some exploratory oil wells instead – far more likely to stay afloat that way!

On 16th Feb 09 Property Wire reported that “…there are almost no visitors” to the International Property Show that opened in Dubai on the preceding day. Conversely, Sheikh Mohammed bin Khalifa Al Maktoum, who is Chairman of the Dubai Land Department and was inaugurating the Property Show, was talking up the prospects for the year ahead. Sheikh Mohammed said, “Dubai will be the fastest city to recover from the impact of the ongoing credit crunch, and the emirate’s real estate sector will once again witness a period of long term boom. The impressive participation of players at the ‘International Property Show – Dubai 2009′ underlines the high confidence in the UAE’s property sector.”

I for one would not blame the leader for trying to inject some much needed confidence into the spooked market at this time. However as a basis for deciding what will actually happen in the Dubai Property market, it would be difficult to justify.

Predicting the Bottom

The AME Info article mentioned in the list above quotes a guy called Ryan Mahoney from Better Homes, Dubai’s largest estate agency (for how much longer – who knows?) Mahoney told AME Info that, “sale prices in many of the city’s developments and communities were already approaching the lowest that they could conceivably fall to.” Now that’s the part where I was rolling about laughing. He’s hoping!

Trend-reversal predictions are virtually always wrong. In any case, the reversal points can only be seen after they have happened, usually many months afterwards in the case of property. The property market like all major markets is not only governed by supply and demand as these touts would have you believe. They say that now that not so many properties will be hitting the market and now that the existing stock has plummeted by 40%, or whatever the latest figure is, it means that the buyers will be back. Yet that’s not nearly the whole story.

The most likely scenario, based upon how these markets tend to play out historically speaking, is that it is far too early yet for buyers to return in meaningful numbers to the Dubai property market. People still remember the high prices of last year which were largely driven by speculators. Now that they have fallen by this arbitrary 40%, 50% or whatever, yes there will be some buyers who will fall for the memory trap of judging value based on where prices have just fallen from.

This will include buyers who may still have some cash lying about and will not need major financing. When these ‘reminiscing’ investors, anticipating a possible snap-back to the glory days show up, prices may stabilise for a while and maybe even recover a tiny bit. Thus we may at some point get a ‘bear market rally’, also known as ‘dead-cat bounce’. This is a colorful term that likens falling markets to a cat thrown from a tall building. On hitting the ground the cat, though dead at that point, will still bounce once before returning to the ground!

Unfortunately any such temporary recovery will be on very thin volume. Moreover it will prove a final chance for those sellers who had lost all hope, to sell into the rally and offload, whether at the price they bought or even at a loss. Sellers will outnumber buyers once more and the market will again descend towards its true bottom as those who ride upon the Dubai property ship will abandon all hope after finally erasing from their minds and hearts the distant pleasant memory of the 2008 high point.

Only Time will heal Fear

Even when banks eventually start lending again, the collective fear of investors and speculators will take a long time to be erased. These herds will remain scared witless of ever putting their money into foreign markets again. This fear is unlikely to dissipate in just a few months. Rather we are more likely to be looking at some years down the line.

Furthermore there is not even any guarantee that when global credit starts flowing again, whether the new money will even go into property again in a big way for decades. Often when one bubble pops, then the next one which follows it is in a different market altogether. Those of you who remember the Dotcom bubble of 2000 will recall that after that mania exploded it never returned. The new bubble after that was property. Now that this one has popped, who knows what the next one will be. Perhaps Art, or Gold? Some more likely candidates are New Energy Technology Companies, Stem Cell Pioneers and Nanotechnology Enterprises.

Just Stop Building!

My message to the leaders and visionaries of the Dubai experiment:

By all means try to put the brake on the property slide, however know this – your success will be limited, so don’t waste too many resources on it. Instead why not diversify into new areas and technologies. Allow Dubai to mature and evolve and not remain real-estate based. Don’t try to re-inflate a bursting bubble – wake up and smell the sheesha – there’s going to be more holes in it about to pop!

In fact, why not just stop building altogether?? Simply finish off the projects which are almost done, refund everyone else’s money for promised projects and then….STOP! Dubai has more than enough accommodation for now. Do you need to add more? By limiting supply going forward it will become a finite resource, like Monaco, and this will eventually stir competition amongst buyers to pick up a place while they are still available. Then get your Nakheels and your Emaars and turn them into something totally different, as mentioned above. Perhaps create niche disciplines in the fields of Solar power, Genetic engineering and Space science? Add some substance to Dubai rather than just glitz and glamour.

Come on guys – get your thinking caps on – there’s more in the World than just the tallest Skyscraper!

I welcome comments on this blog article – what do readers consider could be the next big thing which Dubai could excel in?

It relates to an issue that has concerned us in the past when considering investing in Dubai beachfront property, in particular the reclaimed islands such the the Palms and the World.

Having been literally raised from the sea so recently and with nothing similar nearby of any history or track record to compare against, that primitive part of our mind, the place where ‘gut instinct’ resides (the amygdala) has always nagged away at us about the question of whether such reclaimed islands could just as easily go back to where they came from, whether through erosion over time, or by a one-off event such as a tsunami.

Could a tsunami affect Dubai?

The answer to this question is ‘probably not’. A Tsunami Seminar held in Tehran in September 2006 assessed the risks to the Gulf area of future seismic events, in the wake of the Indian Ocean tsunami disaster of 2004. Representatives from various high ranking Meteorological, Oceanographic and Seismology organisations were at the event as well as various professors. A full report from the Iran Daily newspaper can be read here.

Map of The Persian Gulf

For the Sea of Oman/ Arabian Sea region overall, there is actually an identifiable tsunami risk. This is attributable to the Makran Subduction Zone that runs along the coast in Southern Pakistan and into Iran. A seismic event in this zone could generate destructive tsunamis in the Sea of Oman, south of Iran. Should a tsunami occur in the region, tidal waves could reach Iranian and Pakistani coasts in between 15 and 30 minutes and could inflict irreparable damage on coastal regions. The last time such an event occurred in this area was in November 1945 when the Balochistan Earthquake, measuring 7.8 on the Richter scale triggered a huge tsunami that hit the whole Makran coast, reaching heights of up to 40m and killing 4000 people in Pakistan.

As for Dubai and the Emirates, it would seem that they may, fortunately for investors in the Palm, be at very low risk from tsunami events due to the shallowness of the waters in the Persian Gulf. The average depth of waters in the Gulf is a mere 50m, with a maximum depth around 90m. That’s shallow enough to flatten any tsunami trying to push its way through the Strait of Hormuz.

OSAC assessment of earthquake risk

On the topic of earthquake and tsunami risk in the UAE, The American “Overseas Security Advisory Council” (OSAC) which provides information to organisations operating in various regions worldwide has this to say:

“In response to the recent tremors, seismic experts have provided the following information:

- Parts of the UAE have the potential for a substantial earthquake. This potential is greatest for regions near the Oman Mountains.

- In much of the UAE, the weakly consolidated materials on which buildings are constructed would tend to amplify ground-motions (i.e., liquefaction), thus increasing the likelihood of damage to buildings.

- Because the recurrence interval of earthquakes is not known, a useful assessment of seismic risk in the UAE probably cannot be made at this time. It is probably reasonable to conclude that seismic risk in the UAE is less than that in western California, but it also is reasonable to conclude that it is not zero.

- One should also consider the tsunami risk to the eastern coast of the UAE, as a large displacement along the Makran Fault (fault offshore of Iran and in the Gulf of Oman), could produce a tsunami.”

The full report can be read here.

Earthquake Risk lower than London?

On the flip side to the OSAC assessment, the UAE Interact website reported in April 2007 the following:

“The seismic risk in Dubai is lower than that of London and it is not dangerous as has been reported in some risk assessment reports, said an expert. “There is also no possibility of a tsunami in this region because Arabian Gulf waters are not deep enough to trigger a tsunami,” said Angus McFarlane, Technical Director of Building Structures at Hyder Consulting Middle East.

Speaking at a seminar on ‘Seismic Hazards in the Gulf’, he said the seismic risk assessment indicates that the seismic hazard in the UAE, Qatar, and Bahrain is significantly low. ”

The full article can be read here.

Beach Erosion and Sea Levels

The visionary World Islands

“…the hundreds of thousands of new islanders will be living just 10 feet above the waterline. Last month, giant waves swept away five workers on the Palm Jebel Ali, one of whom drowned.”

In the same article Frederic Launay, director of World Wide Fund for Nature in Abu Dhabi, said, “If you build on a low coast like that you’re exposing yourself to dramatic consequences, a high wave or high sea, or even if the sea rises.”

As for the problem of beach coast erosion, this is a long-term problem that predates the man-made island projects themselves. According to a Gulf News report dated Dec 7, 2007, available here the coast erodes at a rate of 50m every 2 years! This is from a hoard of data collected by engineers from the Coastal Management Section at Dubai Municipality since 2000.

Without five-tonne bags of sand strategically positioned 100 metres from the shore to form protective groynes the recently nourished Umm Suqeim I beach would wash away, potentially taking houses along with it.

To combat coastal erosion caused by the impact of the sea, 500,000 cubic metres of sand had been poured along the shore to pad out the receding coastline during 2004, said Alya Abdulrahim Abdullah, head of the coastal management section at Dubai Municipality (DM).

The area under her authority stretches between the Sharjah and Abu Dhabi border, almost 70 kilometres, 10 nautical miles offshore and 1 kilometre inland. This area is defined as Dubai Coastal Zone.

The new man-made islands for their part had contributed to an increased rate of erosion as they had altered the wave patterns hitting the natural beaches. However since the erosion issue is a known one it is something that the Coastal Management Dept will be keeping one step ahead of, with initiatives such as sand replenishment, wave-breaks, and policies for construction companies whereby they must dump any excavated sand of beach quality at specified sites on the coast to help in replenishment.

Man-made, Man-maintained, Man-dependent

Without question, the Dubai palms and the World archipelago are amongst the most beautiful and audacious creations of man in modern history. They are of course a modern day miracle. Yet they are subject to the same old forces of nature, forces that prefer to pull down organised structures into disorganisation, to turn order into chaos.

The Dubai coastline and these islands will always remain a dynamic battle between Man and Nature. The gradual erosion effect of the tides will need a sustained replenishment effort over the years. However if anything more dramatic were to occur, such as global warming causing sea levels to rise, or a tsunami-type event (though unlikely) then the best efforts of Man may not be enough.

Flipping is fun - but don't be the last one left holding the parcel!

Our feeling is that prices have some way further to fall in 2009 before they will stabilise. However like any prediction it gets fuzzier the further in the future you look – it is important to keep reassessing the outlook month by month. A reccy trip in a few months time is definitely on the cards, probably once we get our latest apartment conversion project here in the uk past the initial build stage and nicely ticking along.

We stayed away from the ‘flipping’ game in Dubai despite being egged on by friends who were ‘in the know’. To be fair to the wisest of them, Salman, he advised not to hold on to anything for more than the first couple of payments. That way at least you would have a high probability of profit with minimal risk, and then you could re-invest quickly. The risks were always from the constantly expanding supply of new developments and rental glut if you held until completion.

One thing none of our ‘advisors’ foresaw was the credit crunch that has battered the market so savagely.

Too good to be true?

Our trouble is that we were too suspicious, even of the quick fire approach, being strict adherents to the “if it looks too good to be true then it probably is” rule. Not that we are totally risk averse – on the contrary we have been property investors and developers in the UK for the past decade (and still are). The key point here is that we understand the uk market with great clarity. Enough clarity to have been net sellers of assets over the past 2 years, in anticipation of the bursting property bubble.

As for Dubai, we could honestly say we didn’t understand the market enough to put our hard earned cash there, into the hands of who-knows what kind of system. Trying to make profits flipping property in a peaking market is like the analogy of playing ‘pass the parcel’, the popular birthday party game, except in this case the parcel is a ticking bomb and the last fool left holding it gets his hands burned.

It is true that investment reward is usually proportional to the investment risk. This is as it rightly should be. We therefore give a hearty round of applause to those individuals that put their (own) money on the line and have reaped mega rewards on the upwards leg of the Dubai boom. They took the risk of handing their cash over to developers in an immature foreign land where the legal system has not had time to develop, settle and stabilise and where residency and ownership rights are shaky at best and at worst capable of changing overnight. So if they made money they deserve it.

The Dubai Experience

Of course not everyone buys property simply to flip as an investment. Often it is for practical reasons such as the expats who are actually working out there, or for those like us who can’t see ourselves as part of the Dubai working culture yet would enjoy a holiday pad for our families, where we could select the time of year when the weather was balmy and beautiful. We could be partial to a bit of shopping heaven, some dune bashing, fine cuisine and beach frolics (and no – we don’t mean the kind that gets you deported!)

Ultimately, once one is over the Dubai experience itself, a pad in Dubai would also be a great point from which to branch out and explore the wider region, including the neighbouring gulf states as well as slightly further out to Singapore, Hong Kong etc. Last time we were there we visited Oman, which although just across the border was an entirely unique experience in itself, with its more mountainous terrain and unspoilt landscapes. The capital, Muscat, had a superior tranquility about it and its pristine, quiet roads were lined for miles by manicured lawns, trees, shrubs and flowers.

Still, we are city types and there’s only so much tranquility that we could bear before our heads would explode, so the clamour of Dubai was in the end just as alluring. But the juxtaposition of old and new, fast and slow, city and mountain, concrete and nature meant that a taste of each enhanced the appeal of the other.

Conspiracies and Secret Agendas

Before ending this post, we return to our pal Salman. Being the wise person he is (quite the entrepreneur) he shared with us his personal conspiracy theory about Dubai property prices and the crash to come, which at the time one year ago, no-one was predicting. We laughed it off at the time – and still do – but will share it with you anyway just for fun.

He proposed that the speculation and rampant price escalation was an anticipated event, something encouraged and perhaps even helped along, but not by the sheikhs or any emiratis. No! This was a conquest by stealth, a takeoever under the guise of free market forces!

secret forces after Dubai?

Well how about financing masses of property deals and bankrolling the government to get more and more debt laden. Those powers-that-be would be well placed to win when the market went up by a great return of interest payments on their capital lent out.

Ultimately when the market crashed, they would acquire defaulted property en masse, thereby becoming major landlords, and perhaps even the government would be at their mercy, especially since it has very little oil reserves and the oil price is at a low point in its cycle. Their power and influence would steadily increase, perhaps with the ultimate aim of becoming the dominant voice behind a puppet state.

Is such a scenario probable? We think its unlikely.
But is it possible? Well………….its not impossible.

Our conclusion is that its just another conspiracy theory. You may beg to differ. We await your comments.

falling debt ratings will hurt Dubai companies further

We hear that Moody’s Investor Service, a credit ratings agency that assesses credit risks in relation to corporate debt issuers and sovereign nations is considering dropping its debt credibility ratings for six of Dubai’s major companies that enjoy strong state backing. The companies mentioned are:

1. Emaar
2. DP World
3. DIFC Investments
4. Dubai Holding Commercial Operations Group
5. Dubai Electricity and Water Authority
6. Jebel Ali Free Zone.

Currently Moody’s debt rating for Emaar is A3. Emaar’s share value has dropped approximately 17% in the past 12 months. The rest of the bunch are currently on A1 ratings. The re-rating is likely to bring all six down a notch or two.

Moody’s cites the deteriorating macroeconomic outlook for the region, and says Dubai has been hardest hit, due to its dependence on cyclical sectors such as tourism, property and financial services.

The re-ratings will mean of course that the already cash strapped corporations will find it more difficult to raise new funds or renew finance, and where they are able to get finance that will come at a higher cost due to the perceived increase in risk in lending to these entities.

This could also not have come at a worse time for the government of Dubai which is currently running a debt of around $80billion.

The government claims to own $90-$95 billion in assets and therefore says it is more than able to meet its debt obligations. However statistics are hard to come by, and fiscal accountability even more so. Hence these claims are almost impossible to substantiate independently. With oil prices down more than $100 from their 2008 highs and now the falling real estate asset valuations across the region, Moody’s senior vice-president in corporate finance, Philipp Lotter says “We don’t know what these assets are,” and “their liquidity cannot be taken for granted.”


What it means for Emaar and co.

The state backed real-estate companies may well find all their avenues of finance drying up, i.e.
a) diminished state funding due to factors mentioned above
b) non-existent retail investors who previously bought off-plan to fund build stages,
c) drying up of external funding due to global liquidity squeeze, as well as unfavourable terms on any funding secured as mentioned above.

This will lead in the short term to a reduction of finished units coming online. Any that are released to the market will require generous price reductions and/or incentives to stand a reasonable chance of shifting them in the current climate. These diminishing returns from sales will feed into the vicious circle of diminishing build capital, leading to more development freezes and job losses and further reduction in ability to bring completed units online.

It looks like Emaar and the rest of the club can expect their profits to be creamed in 2009 – 2010.

Whether the Dubai government will be in a position to nurse them through it, we shall wait and see. Much will depend on how much buddy and neighbour Abu Dhabi will be willing to lend them.

Then again there is always the millions belonging to crime lords that needs laundering. We’re not suggesting that such wealthy individuals are encouraged into Dubai or accepted there with open arms. However nor do they appear to be rooted out and removed. The British tabloid paper, the Mirror, reports in this article that “Crime bosses are fleeing to the United Arab Emirates state because there is no extradition treaty with the UK. They are also using the property market there as an easy way to launder their millions.” So maybe there will be at least one group of investors that Emaar and co. can rely on, even in the downturn.

As possible investors in Dubai ourselves, we shall be making sure we are sitting on our hands for most of this year, with hands glued to the chair just to make sure, and chequebooks stashed in a time-locked safe set to open in 12 months time.

Piers was clearly impressed by Dubai

There was nothing particularly new that we haven’t all seen many times before, yet when you watch any footage of Dubai, you cannot help to be wowed by the sheer grand scale of the Dubai project. After all the negatives we are hearing lately, even on this website(!) it makes you remember that somehow Dubai is something special after all. There is something to it. However its not all bright lights and glitter, for the city is still very young and has a lot of growing up yet to do. The laws often change overnight and you get the nagging doubt that its perhaps too good to be true. Like a Hollywood set that looks great at the front, but is just cardboard cutout, behind which is just desert. Wait, it IS just desert behind Dubai!

Piers Morgan for his part, was trying to give a balanced account of life out there from an expat point of view. However he succeeded only in showing Dubai as a place of excess, where greed is good. The expats he spoke to were only the uber-successful entrepreneurs, who all knew how to ‘work hard’ and ‘play hard’. There was the secretary from the home counties who has become a wealthy estate agent in four years with her own polo team complete with horses and trainer, and another girl from equally humble beginnings in the UK who runs her own magazine out there and frequents the polo get-togethers on the weekends at Arabian Ranches. The expats we met on the programme seemed to spend every night partying down at Barista bar and the rest of their spare time at the shopping malls. What was shown was a glitzy lifestyle and a very alluring one – I bet there’s going to be plenty of secretaries tonight going to sleep dreaming of moving out to Dubai to make their fortunes and sport permanent tans. However we didn’t meet the more middle of the road Brits, the bog-standard employees working out there. It would have been good to hear some of their views and opinions of life in Dubai.

In an attempt to inject a little bit of reality (!) into the mix we did get to hear from a computer magazine journalist who’d had his office shut down about 10 years ago because he’d dared to publish an article about an emirati with high contacts about how his computers didn’t work. Thankfully we are told, nowadays such censorship is unlikely. Still, Piers tells us, there seems to be a pervasive fear amongst the expat community that if you put a foot wrong or say the wrong thing, you could get deported at the stroke of a pen with precious little notice and no recourse to appeal. On the other hand Piers found it impossible to find anyone who had actually been deported so he concluded it was probably more an urban myth. Errrm…hello…thats because they’ve been deported so you’re not going to find them in Dubai!

Anyway the upshot of the urban myth is that there is very little crime in Dubai. The camp fashion photographer who had been expelled from the USA due to jewel thefts and subsequently allowed entry into Dubai positively adored the place. He felt that the strict rules were a small price to pay for the security of knowing you could leave your doors unlocked or your car window down and no-one would dare to steal.

We are shown that there are several strands of society, which never really mix on a social level. Piers literally skims over the majority of expats from the Indian Subcontinent who do the manual labour including most of the manual construction jobs. We don’t get to hear from even one. Perhaps part of the contract for being allowed to film there? On the other end of the spectrum we see some of the wealthy sheikhs, the actual rulers of the land who are all fabulously wealthy and can spend millions on anything they desire. Yet for them its more about showing capability rather than spending money. We meet Dr Sulaiman Al Fahim, one of the men behind the recent takeover of Manchester City Football Club, aboard his private plane as he explains
“It’s not about the egos, it’s about showing capability. We want to show the royal family that we can do it, and what they’re looking for is to build something unique, something extraordinary.”

Dr Al Fahim does not let money distract him from his true source of happiness, which is spending most of his social time with family. Of course having the cash to buy your family anything they desire probably helps! Dr Al Fahim shows us his one of a kind lamborghini with number plate “93″, worth $2 million. Why “93″? because its the year his wife graduated. How cool is that!
Piers wonders whether he can join the family by getting to know any of the single ladies. However he doesn’t get round to posing the question out loud!

We also got to meet Patty Parfitt, ex-wife of Status Quo band member Rick Parfitt. She lives with her son in a quiet expat gated community some miles inland, at least half an hour’s drive from main downtown Dubai. Yet her villa cost her £32,000 to rent last year, all of which had to be paid up front. For the coming year the rent had almost doubled! Anyone coming to Dubai she told us, must seriously weigh up whether the lifestyle is actually all its made out to be. Certainly you would need to be on pretty good money to afford those kinds of rents. Reading between the lines we also get the feeling that she is rather lonely. It seems getting to know people is not easy, especially for an older person who doesn’t have a job of sorts. She tells us that most people tend to stick with their families. Piers twigs and describes how it is apparent that she has fallen “out of love” with the Dubai dream. Patty gives a resigned sigh and a sad smile.

Despite these contemplative time-outs though, by the end of the programme we are left in no doubt that Piers Morgan cannot help but be impressed by the magnitude, grandeur and sheer scale of ambition that surrounds Dubai and its ruling Sheikh, Sheikh Mohammed. The latest ultra massive project on the go is Dubai Land, which is a theme park bigger in area than Birmingham, and with full scale replicas of the Taj Mahal, Eiffel Tower, the Las Vegas Strip and the Pyramids. It is apparent that what is happening here is the modern day equivalent of the Great Wall of China being built, and it’s happening before us, in our lifetime.

“As for the credit crunch,” says Piers, “everyone I have met here says the same thing, Dubai won’t just survive, it will thrive and that’s because it’s bursting with ambition and drive all lead by one man’s extraordinary vision and utter determination to turn this place into the biggest and most successful city in the world.”

To conclude his programme, Piers Morgan sums it all up in the words of any british builder – “It’ll be alright when its finished!”

Our thoughts after watching the programme? On the balance of it, just because of the grand scale and world leading vision of the place, it is certainly a contender for investment . However it is cetainly not immune to the credit crunch by any stretch. What is needed is a natural cooling down over the next year or two. After that without doubt there is every likelihood that we will continue to see sparkling gains from Dubai property, although hopefully on a more sustainable and gradual pace. Looking out 10 to 15 years, anyone who is able to afford to invest in Dubai as part of a balanced portfolio, should see solid gains. As with any investment though, spread your risk, diversify and don’t gamble with money you cannot afford to lose.

Links:

Watch the programme online at ITV catch-up (expires 26/02/09)


Piers Morgan on Dubai : The programme website

We’ve been speaking to our friends who are long-term residents in Dubai again.

According to word at ground level the number of expat families that have quit Dubai due to job loss over the past year and a half is around 60,000 already, and the pace of departures has been steadily picking up speed over the last quarter.

The advertising and construction industries are amongst the hardest hit. Last month Nakheel cut 500 workers, and in November Damac dropped 200.

We hear, though not through official channels, that as of this week, upwards of 1000 families per day are going home after losing visas, mostly back to the Indian subcontinent.

The Dubai system is pretty efficient at both ends of the job tunnel. When you first get a job offer then work permits are usually arranged quickly by the employer with minimal fuss. Once you lose that job though, the process is just as efficient. You are given a one month grace period to find another job. After that your “bataqa” (work permit) is withdrawn and you’re on the next flight out. If you delay then you get charged a fine by the hour!

This policy is implemented strictly and robotically. We have a personal story which illustrates this quite well – some years back an uncle of ours who had spent 26 years working in Dubai (without acquiring citizenship rights even after 26 years and kids having been born and brought up there) had to leave with his family after his job as an accountant ended due to retirement. His outbound plane was delayed by 3 hours. The officials at the airport made him pay a fine!!

Business tip – check the Govt car auctions

'the Dubai Job' - starring Michael 'expat' Caine

In many cases these loans have been guaranteed by their sponsors, the companies employing them, and they are left to foot the bill. However with companies themselves going bankrupt an increasing amount of debt will be now written off or given to debt collectors to chase, even around the world if the absconder hails from a country with information-sharing links.

Although the number of absconders is already way higher than its ever been, at present its mostly single guys and bachelors who are bailing out. Once the school year ends in the UAE it is likely that there will be another large wave of people skipping, this time many will be families. Families mostly pay school fees up front for the year, so any hard up families contemplating leaving Dubai in this way may well wait until the summer before they uproot.

kitne ka kiya?

Often the mechanics of such ‘hits’ was an individual setting up a legitimate business in Dubai, usually a shop. The shop would trade for some time and gradually build a credit line and accumulate large stocks in the warehouse, perhaps in the millions. Then one fine night the proprietor would call in black market specialists who would happily buy the stock in cash for a bargain price, still leaving the proprietor with an enormous profit. He would then cut and run in the night, leaving an abandoned shop to be discovered the following day!

Health warning – Property losses causing Heart-break

More from our pal in downtown Dubai who is awaiting heart surgery.

His essential, though not emergency, operation has now been put back for the fifth consecutive time by surgeons who have had a sudden increase in their workload. He has been told by the apologetic doctors that there has been an unprecedented number of men who have suffered massive heart attacks requiring emergency bypass surgery after losing in some cases many millions of AED in the property market!

This is both sad and stupid at that same time. Did they really think the market would go up forever and that making money was so easy and risk free? Yes, we’ve heard the adage “You have to speculate to accumulate” but someone should have told them another one: “You don’t speculate with money you cannot afford to lose.”

These wise words are worth remembering for anyone contemplating getting into the market at this time.

That used to be the oasis where Dad proposed to Mom

Unfortunately Dubai is no laughing matter now, especially not for the property investors from all over the world who now stand to lose a great deal. A friend currently working in Dubai sent his woes in an email. This one line sums it up “sh*t has started to hit the fan over here in Dubai”.

Several major Dubai property developers have begun laying off staff, and others are reviewing their recruiting needs as the available global finance becomes thin. Although hard statistics are difficult to come by for the region, a case in point is Emaar who is considering job cuts in the wake of the tumbling market. To keep you in perspective Emaar is the Gulf region’s largest property developer by market value, 32% owned by the Dubai government and is the developer behind the world’s tallest tower, the Burj Dubai.

Emaar shares were down nearly 80% in 2008 to 3.19 AED a share. Realtors are identifying worrying trends of rapidly declining house prices, a stagnant resale market, the inability of off-plan property investors to keep up with their payment schedules, a marked decline in hotel occupancy rates and wage and hiring freezes in property companies. To make matters worse, they have highlighted the government’s indebtedness [Yes Dubai is not as rich as you thought - it's Abu Dhabi which still has oil]. Dubai has borrowed heavily in recent years to finance all of the physical infrastructure needed to support its construction trend. So much is the fear of a Dubai Doom that the UAE President, His Highness Shaikh Khalifa Bin Zayed Al Nahyan had to reassure the people of the UAE that their economy is supported by a healthy and robust national banking system [do you believe in a healthy bank these days?! Lol and chuckle]. A royal effort indeed to save the Dubai Dream.

Still phenomenal projects are being announced in the Dubai heartland similar to existing ones such as Burj Al Arab and the Indoor Skiing Resort in the Emirates Shopping Mall, but I don’t see anyone buying these new projects. Local Urdu and Hindi channels in the UK are saturated with Dubai Exhibitions and to be honest they sound somewhat desperate. I know someone who bought property two years back in Dubailand and though on paper the value has gone up he has no buyers interested in taking it off his hands. There is virtually no resale market at all for these new apartments. Once you buy one, you are stuck with it.

The new Atlantis - perhaps an apt name?

[this article originally published on our sister site www.ultranomics.com by jq]