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