“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?

We’ve been speaking to our friends who are long-term residents in Dubai again.

According to word at ground level the number of expat families that have quit Dubai due to job loss over the past year and a half is around 60,000 already, and the pace of departures has been steadily picking up speed over the last quarter.

The advertising and construction industries are amongst the hardest hit. Last month Nakheel cut 500 workers, and in November Damac dropped 200.

We hear, though not through official channels, that as of this week, upwards of 1000 families per day are going home after losing visas, mostly back to the Indian subcontinent.

The Dubai system is pretty efficient at both ends of the job tunnel. When you first get a job offer then work permits are usually arranged quickly by the employer with minimal fuss. Once you lose that job though, the process is just as efficient. You are given a one month grace period to find another job. After that your “bataqa” (work permit) is withdrawn and you’re on the next flight out. If you delay then you get charged a fine by the hour!

This policy is implemented strictly and robotically. We have a personal story which illustrates this quite well – some years back an uncle of ours who had spent 26 years working in Dubai (without acquiring citizenship rights even after 26 years and kids having been born and brought up there) had to leave with his family after his job as an accountant ended due to retirement. His outbound plane was delayed by 3 hours. The officials at the airport made him pay a fine!!

Business tip – check the Govt car auctions

'the Dubai Job' - starring Michael 'expat' Caine

In many cases these loans have been guaranteed by their sponsors, the companies employing them, and they are left to foot the bill. However with companies themselves going bankrupt an increasing amount of debt will be now written off or given to debt collectors to chase, even around the world if the absconder hails from a country with information-sharing links.

Although the number of absconders is already way higher than its ever been, at present its mostly single guys and bachelors who are bailing out. Once the school year ends in the UAE it is likely that there will be another large wave of people skipping, this time many will be families. Families mostly pay school fees up front for the year, so any hard up families contemplating leaving Dubai in this way may well wait until the summer before they uproot.

kitne ka kiya?

Often the mechanics of such ‘hits’ was an individual setting up a legitimate business in Dubai, usually a shop. The shop would trade for some time and gradually build a credit line and accumulate large stocks in the warehouse, perhaps in the millions. Then one fine night the proprietor would call in black market specialists who would happily buy the stock in cash for a bargain price, still leaving the proprietor with an enormous profit. He would then cut and run in the night, leaving an abandoned shop to be discovered the following day!

Health warning – Property losses causing Heart-break

More from our pal in downtown Dubai who is awaiting heart surgery.

His essential, though not emergency, operation has now been put back for the fifth consecutive time by surgeons who have had a sudden increase in their workload. He has been told by the apologetic doctors that there has been an unprecedented number of men who have suffered massive heart attacks requiring emergency bypass surgery after losing in some cases many millions of AED in the property market!

This is both sad and stupid at that same time. Did they really think the market would go up forever and that making money was so easy and risk free? Yes, we’ve heard the adage “You have to speculate to accumulate” but someone should have told them another one: “You don’t speculate with money you cannot afford to lose.”

These wise words are worth remembering for anyone contemplating getting into the market at this time.

According to the 'Skyscraper Index' this is one mighty nail in the coffin!

Whilst looking for interesting indicators to the dubai property market, we remembered an out-of-the-box, less well-known marker of business cycles called the Skyscraper Index.

Could it be that the building of record breaking Skyscrapers could be used as a tool to predict the onset of economic downturn?

The answer according to economist Andrew Lawrence, research director at Dresdner Kleinwort Wasserstein, is quite possibly, Yes!

Back in Jan 1999 Lawrence put forward a concept which he called The Skyscraper Index.

He suggested that Skyscraper construction seemed to have a direct correlation to business cycles. Many skyscrapers over the past century seemed to have been constructed on the eve of economic downturns, at the end of a business cycle when economic growth had been exhausted. It wasn’t that they caused the downturn, just that they were a predictor of it.

Andrew Lawrence linked this phenomenon to economic factors which seemed to progress through a boom and peak at the end of the boom cycle. These factors were overinvestment, speculation and monetary expansion.

A decline in interest rates at the beginning of a boom has at least three effects which contribute to skyscraper construction. Firstly it drives land prices higher, hence the attractiveness of constructing a tall building with a small footprint and thereby increasing vertical density. Secondly, declining interest rates allow an increase in the average size of a company, creating demand for more office space. Thirdly, low interest rates provide investment to construction technologies that enable developers to break earlier records. All three factors peak at the end of the growth period.

Although some critics have dismissed the index as being an unreliable tool, nevertheless it appeals to the common sense approach when we consider the above mentioned factors in relation to speculation and overinvestment during boom times.

The table below lists previous skyscrapers which were all built on the cusp of recessions, and were often completed after the booms were well and truly over.

Record breaking skyscrapers and associated crises

As for the Burj, the coming year will tell us whether Emaar will be able to add yet another accolade to its collection – that of No.1 Endorser of the Skyscraper Index.

For more on this indicator, try the following:

Skyscrapers and Business Cycles [Ludwig von Mises Institute]
Skyscraper Index [Wikipedia]