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!

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

In the worst case scenario for the coming year, UAE Investment bank Shuaa Capital reckons that real estate is heading for up to 60% falls by the end of 2009, after which they should begin to stabilise at the new lower level. The bank reports that property in some parts of Dubai has already plummeted by 40%. It says rents could fall by 20% up till 2011.

hundreds of work permits being cancelled daily

With companies actively shedding jobs and anecdotal evidence suggesting 1500 work permits and visas being cancelled daily, the Dubai population is set for a 5% shrink in 2009 according to Shuaa, meaning demand for both rental and owner-occupied property is headed decidedly in one direction. Add to that the spectre of home buyer residence visas being cancelled and the supply of mortgage funding drying up and you can see their point!

Swiss Bank UBS thinks a 8% contraction in the population is likely to be nearer the mark, blaming the downturn in the construction and real estate sectors. Hardly a revelation.

The Q4 2008 House Price Index (HPI) released by Colliers International last week (which is culled from actual mortgages completed by members HSBC, Barclays, Amlak, Dubai Islamic Bank, Emirates NBD and Abu Dhabi Commercial Bank) showed that Dubai property prices on average fell 8% in that period. This was on the back of a 45% drop in transaction volume in Q4. Prices of Apartments fared worst, notching up an 11% fall. Townhouses and Villas recorded 1% and 3% falls respectively. Despite this drop however, anyone who bought a year previously in Q4 2007 is still looking on average at a 59% capital appreciation.

The conclusion? Well you don’t need a degree in finance, or a highly paid job in an investment bank to know that the boom era of Dubai is well and truly stalled. How big or protracted the correction will be, no one really knows, neither Shuaa, nor UBS, nor HSBC or the others. No amount of analysis in the world can predict to a percentage or to a time as these banks profess to do. In the end the factors are too complex and changeable.

In the end each individual must guess for themselves when it is the right time to get back into Dubai property. Treat all news, analysis and forecasts with a discerning and critical eye. Never be a slave to them as they invariably trail behind the market trend rather than predict it in advance.

If you are in the ‘Dubai is a long term play’ camp then you trust that the rulers of the emirate are hardly likely to allow their grand experiment to fail and with the status of Dubai as the major business and tourism hub of the Middle East, it will be worth your while to stay in the game if you can manage to secure funding.

On the other hand if you feel the omens (and your gut instinct) are telling you to keep away then do not let the spurious ramblings of young investment banking analysts sway you. History shows they are usually wrong. With often conflicting analyses, some of them by definition will be wrong in any case.

All we do know is that the current climate of constrained money supply is the key factor in this global downturn. Despite the greatest desires of the Dubai authorities, Dubai will not be immune to these factors since they affect the core drivers of the property market, namely the individuals who need mortgages to purchase, and the companies who need finance to thrive and recruit in the area.