Dubai property crash serious but not terminal
Posted on 04 January 2009 with no comments from readersOrder my book online from this link
In mid-December the Dubai office of Engel and Volkers tried to kick start sales in the stalled secondary Dubai property market with $48 million knocked off the selling price of 150 homes in New Dubai for one day.
Not a single unit sold, despite marketing to dozens of clients supposedly interested in real bargains and a mortgage company on hand to arrange finance. What has happened and what must change to bring the buyers back?
In my view three things need to happen before the buyers will return: the oil price must rise and stop falling; the dollar must weaken, and reverse its recent strength; and liquidity must return so that mortgage rates and loan-to-value rations make home ownership affordable.
There is, of course, a fourth option: sellers could slash their prices by 50 per cent. Then they would have a queue down the road.
Home finance
Standard Chartered Bank’s latest UAE report gave some hope that liquidity will return from this spring with oil money injected directly into the local economy rather than going to sovereign wealth funds. The Central Bank has so far confined itself to making funds available to local banks at rather high rates, and not targeted lending to specific sectors like real estate.
Something needs to be done. A combination of the withdrawal of money by dirham-revaluation speculators over the summer and stock market investors pulling their money out of the country, has left banks very short of dirhams, so they have raised local interest rates to attract money.
UAE mortgages currently cost around twice US mortgages despite the supposed dollar link, and this is dreadful for real estate. That is if you can get them. The loan-to-value ratios are also very tight meaning that only buyers with a 40 per cent deposit stand a chance of getting a mortgage.
This local credit crunch happened very suddenly over the summer and it seems directly responsible for toppling prices that peaked over these months. At the same time that credit tightened up, global and local stock markets crashed and the dollar enjoyed an unexpected renaissance.
US dollar strength
The US dollar’s recent strength is not only bad for tourism. It is bad for foreign investment in UAE property, as it has become more expensive in foreign currency terms. Indeed, it encourages people to sell here and buy overseas, if they can sell.
However, with the US now mired in the worst recession since the 1930s it surely cannot be long before the dollar weakens. Zero Fed interest rates and quantitative easing of monetary policy spell the end of a strong dollar and the resumption of devaluation.
Many commentators see the US bond market as the last great investment bubble and when that pops the dollar will fall, perhaps as soon as the middle of this year. This should help UAE property prices to re-bound as foreign funds will probably return, as historic yields on local property are high.
Then we have the oil market to consider. It has dropped like a stone from $147 a barrel in July to $33 last week. A severe recession could keep oil prices down for a period, but the fundamentals of tight supply will mean that any recovery in demand quickly translates into higher prices.
Oil prices
Indeed, this is one of the best reasons to be optimistic in the long-term about the UAE economy with its low-cost oil output, investment to increase output and huge reserves, and therefore its property market over time. But oil could touch $25 and scare people stiff next year and that will not assist a recovery in property prices.
Engel and Volkers said people are really looking to buy at less than half present asking prices, and it could be that the market will stall until they get what they want. But holding on to property still makes sense for all but the most desperate sellers because the UAE recovery is already in the stars.
The recovery hat trick of high oil prices, cheaper finance and a weaker dollar is coming but will likely not be fully in place until almost 2010. Add to that the loss of supply due to the severe squeeze on property developers in 2009 and you could see a very sharp price recovery, especially if global stimulus packages produce expected inflation.
This is what happened in the last real estate recession in 1998-2000 in Dubai. Then as now low oil prices caused a sudden economic downturn and some projects were cancelled while a number of highly prestigious projects like the Burj Al Arab seven-star hotel and the Emirates twin towers, went ahead. Nobody slashed rental prices and property stood empty rather than accept price cuts.
State control
Of course, the Dubai market was closed to foreigners at that time and it remains to be seen whether such a united front can be presented against a property downturn now. But with 70 per cent of property projects in the hands of the three major state-owned or state-controlled developers there is still a considerable concentration of market power, and an ability to proactively manage upcoming supply.
With thousands of redundancies already declared in the real estate and construction sector it is clear that developers are cutting back sharply on new supply, though they are reluctant to say too much about the cancellations of once much trumpeted schemes.
But this is certainly a final reason to be optimistic about the prospects for a fast recovery in the Dubai property market, provided that growth in other sectors of the economy can be sustained and that demand does not weaken below upcoming supply.
That upcoming supply could exceed demand is the real Achilles Heel of the Dubai property market. The Real Estate Regulatory Authority has recorded 46,000 units under construction and due for delivery over the next two years, barely enough to satisfy annual demand in previous years.
Global recession
But this is far more of a challenge for the UAE amid a global economic recession – with demand for housing possibly falling as expatriates losing their jobs go home, and reason enough to hope for swift action to improve the availability of mortgage finance. Otherwise the flood of newly completed property will overwhelm the market pushing prices very much lower.
Many would-be cash buyers are opting to wait-and-see in this environment and who can blame them. However, an oil price recovery, attractive home finance and a lower dollar could yet come to the rescue. The tragic Gaza War this week will be a reminder of how vulnerable oil prices are to regional geopolitics and how quickly things can change here.
no Comments posted by readers:
Indeed, this is one of the best reasons to be optimistic in the long-term about the UAE economy
One thing that might also encourage people to buy again would be ‘product’ that people actually want to live in.
Not that many people want to live in concrete blocks on the 128th floor, suffering from low build quality, zero parking and appalling traffic problems.
Some quality stock that’s well thought out and well built might make a difference.
The financial crisis has affected everyone across the world and property prices are plunging rapidly. It will take time for all this to come under control.
The reasons for decline in property prices are not the ones listed here. Following reasons need a closer look.
1. UAE government revokes resident visa for freehold property holders. End users take this very negatively. This reduces investor confidences in dubai market. Any rule can be implemented any time. Now state owned companies are screwed big time so the law is being re considred.
2. Service charge increase on projects delivered. 200% to 300 % hike. A 2 BR apartment in old town needs 40,000 AED per annum as service charge. Again an act of greed by the government.
3. Doubling of registration charges for title deed with land department.
4. Dubai becoming too expensive to conduct business. Office rents too high. Home rents too high. Cost of hiring resource and sustaining the resource too high. Companies moving regional base to cheaper locaitons. Moreover people getting fired. Roads in dubai are already empty as they used to be in 2001
Dubai is all set to become a ghost town. Roads in dubai already show signs of the same. Government is in denial. Still thinks Salik has reduced the number of people on the roads of dubai.
I think what can bring the city back to life is a better immigration policy and residentship laws. Also the government trying to be nice to residents and stop fleecing people.
We are about to see a massive meltdown in Dubai of unprecedented scale. The writer, no offense, is a little too optimistic and perhaps naive. Making reference to previous “recessions” is completely inappropriate as this is nothing like anything any of us have seen. UAE banks have not yet started to feel the repercussions of the credit defaults growing in number with each expat abandoning their vehicle and negative equity home loans.
The banks will start failing as they have everywhere else in the world. The UAE is not isolated or positioned any better than anywhere else, in fact I’d lean towards being positioned a little poorer as they have loaned on excessively over inflated property prices and have less chance of holding the thousands of lenders to book when they aren’t able to pay.
Jack is wrong though. What he mentions exacerbated that problem, but what we are experiencing is a global trend not specific to UAE.
2009 brings with it:
• USD crash as US can no longer hide the fact that it is broke
• Increasing problems for manufacturing/emerging markets as source of consumers (US & Europe) dries up
• Continued downslide of UAE property and business as global business levels continue their downward spiral
• Sovereign debt exposure unable to bail out failing UAE economy
• Gold at USD1200+
Excuse me but I find your arrogance astonishing, no offense intended. I have written the current No1 bestseller about Dubai, lived here 12 years and made a fortune in this city, what are your qualifications to comment? On your exact points:
1. The US dollar rallied in 2008 in the crisis, if the crisis gets worse will it not rally some more?
2. Downslide yes but not a collapse – bank exposure to home loans is very, very small here (this is not the UK where you probably come from, 20,000 home loans here is peanuts) – car loans might be a bigger issue but the car still has a value when it is returned.
3. Dubai has debts due of $15 billion this year while the Abu Dhabi sovereign wealth fund is worth $350 billion – it helps to have wealthy friends in a crisis.
4. Just remember this is the UAE – and not the UK, and if that is your background you need to start learning your A,B,C before thinking that you have any wisdom worth imparting online. Creditor nations will triumph over debtor nations in this crisis – and the UAE is the world’s largest per capita net creditor country.
5. Gold, yes you might be right, but then people said the same a year ago and gold will not climb while the dollar stays up.
People are only arrogant until proven right. My qualifications are of little importance in this regard. My opinions, as much as I’d hate to admit, are not a product of my own intellect but a culmination of opinions from economists like Peter Schiff and other realistic economists who don’t need to trumpet their credentials in order to sound knowledgeable.
I maintain my opinion that your views are overly optimistic. This is not just another cycle. Old rules and trends don’t apply here and the investor who believes overly eager salesman when they tell him now is the time to buy is set to loose a lot of money. Lower spending (while people adjust to more sustainable debt ratios) is set to lower economic activity and increase unemployment, creating a vicious feedback loop. This is a global situation that is set to have a significant impact on local markets.
1. Yes the USD has rallied on the optimism of action being taken by the US govt. The honeymoon will end by the end of Q1 2009 when the US can no longer bluff its way out of being broke. Having a printing press is not having wealth. Anyone holding USD based investments is set to loose when the USD devalues.
2. UAE banks were issuing home loans of up to 90% and if you went through mortgage brokers you could even get 100% by topping up with personal loans from alternative banks. I know many people who followed the strategy of topping up with personal loans and credit cards. Buying a home with no down payment and no security, isn’t that sub prime? Vehicle loans are massive and the returned vehicle is only valuable to the bank IF you have someone who will buy it. New and used vehicle sales are standing still and this will not improve in the next 12 months. How many people have taken personal loans for rent, schooling or even to purchase land/homes back home? All this amounts to massive debt with no security. Do you believe that these people will stick around if they loose their jobs and are unable to service their debts? Banks in the UAE are massively overexposed. This is a fact, not my personal opinion. The next 6 months will flush this scenario out.
3. Wealthy friends? Sure, but get real. Abu Dhabi have their own problems they need to deal with. Falling oil prices and international economic turmoil cannot be turned around by sovereign wealth.
4. My A,B,C’s are well in place and my opinions, as stated earlier, are the regurgitations of real economists not living in a world of denial. How will the UAE statistics be affected when all the debtors leave behind their debts for the rest of the population to carry? Will we still be the world’s largest per capita net creditor country? Stop working on last seasons rules and accept the fact that you aren’t in Kansas anymore Toto!
5. Agreed, but I maintain that USD is going down. By your acknowledgment this would mean that gold is going up.
Property prices are already down 40% and set to fall further. Job losses are on the increase and credit defaults are on the rise. We are only entering the same situation that the US and Europe are now thick in the middle of. This is the start of a very long dark day.
A United Arab Emirates-owned developer will delay construction on a Dubai skyscraper that was to be about 3,281 feet tall and billed as the world’s tallest. Developer Nakheel plans to adjust the $38 billion plan, which included the tower, to reflect current market trends. Meanwhile, other developers in Dubai are re-evaluating their projects and laying off workers as property values decline.
Yes I had one comment that was not published that muddled this up with the Burj Dubai which is almost finished and stands 818 metres tall. They are working flat out to get it done by September and any notion of laying off workers on this project is not true – I saw it with my own eyes last week, workers are all over it like ants.
I must say the Nakheel tower looked dead at the launch party in October (which was when the market tanked) – now the whole emphasis is on completing what is under construction (like the Burj Dubai) and canceling almost everything else. Then supply and demand will come back into balance eventually.
Peter, you should not respond to posters (unless you enjoy the fight, in which case fill your boots!) You will find that everyone is suddenly an expert on everything although they are simply rehashing some hyped up tabloid scaremongery as claiming it as their own. Check out any online discussion of UK house prices – the average prediction is that prices will crash about 104%.
Terms like “broke”, “bankrupt”, “crash” are used without thought or understanding. Basically it’s more interesting to claim that “Dubai will become a ghost town” than it is to point out that it will be a tough year followed by a reasonable recovery.
I found your article informative and a breath of fresh air to the media induced hype of the eternal spiral of destruction pedalled and repeated by young Luke here.
Get over it Gareth, Peter understands the pros and cons of being an advisory columnist. Not everyone will agree with him all the time and those people, like me, have the right to challenge him on those opinions. Peter already responded to my fiery attack (?) in his blog of 19th Jan at http://arabianmoney.net/2009/01/19/foreigners-do-not-understand-dubai. It’s the idiots like me (fresh off the boat?) who don’t understand how economies in protected bubbles operate who give Peter the fuel for his blogs (it’s not easy being a muse).
I also very clearly stated that my opinions were regurgitations from leading economists and not the product of my own intellect. Calling me out on that just makes you look more foolish than your uninspired and boring attack on my comments.
But let’s not argue. Let’s reconvene at the end of June and again in December to see how things have panned out. I hope that you will still be around and believe it or not…I hope that I am wrong!!!
Central Bank should offer loans to specific sectors so that these sectors start contributing towards economy rather than becoming a burden.