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!