“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?

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.