Crazy Dubai just carries on building its skyscrapers
Posted on 23 February 2011 with 1 comment from readers
Visitors to Dubai often remark on the endless unfinished construction sites. But after a few days they start to notice that an amazing number of them are actually still active.
Dubai is still building upwards despite a huge oversupply of property in the emirate, and the obvious fact that building more can only depress rental and selling prices further.
Is this crazy? Superficially it looks about as crazy as the boom that went spectacularly bust in the autumn of 2008. But as ever there is some method in this madness.
Risk reward
A Bloomberg article today explains that the cost of completing projects is often much lower than abandoning them, and because of the way they have been financed by staged payments from off-plan buyers, the money to do it is still available. There has also been a big fall in the cost of construction in Dubai and interest rates are also down sharply if the developer’s credit is still good.
Cancel a project and the developers are legally obliged to return all advance payments to their off-plan buyers, or presumably declare bankruptcy and leave them with whatever might or might not be left in the escrow account.
It seems therefore an easier option to carry on building and hope for the best. In an optimistic scenario – perhaps another oil boom and a transfer of many businesses from Bahrain to Dubai – the people would come and the acres of empty offices, shopping malls and apartments would be filled.
This does seem an unlikely immediate scenario. Whatever happens next in the Arab World a continuation of uncertainty and disruption to business looks inevitable. Dubai as the trading and now the only financial centre will feel as much pain as it gets gain from orders that follow higher oil prices, and the Bahrain situation is far from resolved.
New residents
There will only be so many wealthy Arab exiles who can afford to flee to Dubai. But it is becoming a cheaper city with average house prices down 62 per cent from the peak, according to Deutsche Bank. However, those swinging cranes flag up a rising property supply.
Estimates for housing completions over the next two years range from 15,000 to 50,000 units, and nobody anticipates that level of demand. Some of the tallest residential buildings in the world will be completed in that timeframe. Office vacancy rates are above 40 per cent and rising.
Is Dubai crazy to be completing its towers? Will most developers end up bankrupt and the banks own the real estate? Well, at least the city will have a magnificent infrastructure ready for the next oil boom, available at low cost.
1 Comment posted by readers:
In response to the risk/reward theory in the article. The risk is high and those that bought both real estate and stocks have learned their lessons and now know that risk level is high in Dubai for a drop. The reward part is based on hope because the opportunity exists for things to happen so people buy both real estate and stocks based on hope. Without a base the risk will always be high and the rewards will never really exist. The picture looks great in Dubai but reality is reality and reality has shown us both times from the stock crash and real estate crash to remember the risk factor in Dubai which still remains very very high.
In reality Dubai should never have crashed like it did. If it were solid it would not have crashed. If it had a base it would not have crashed. People who have no where to go don’t sell their homes and people that can afford their homes do not sell their homes. When the UAE does not offer a base for expats to live in Dubai the perception of Dubai’s real estate market and stock market will be a hit and run thing and with hit and run things the risk/reward does not look all that great because people only look for short term gains. Long term gains are only good if one can reside in Dubai for a long time.
Ed Note: Form a free zone company and you can sponsor yourself indefinitely.