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?