Dubai Property Market Crash ERIC TOM BIJI 01218
DUBAI Dubai can either refer to one of the seven emirates in the United Arab Emirates (UAE), or that emirates main city, sometimes called "Dubai city" to distinguish it from the emirate. A majority of the emirates revenues are from trade, manufacturing and financial services. Revenues from petroleum and natural gas contribute less than 6% (2006) of Dubais US$ 37 billion economy (2005). Dubai has attracted world-wide attention through innovative real estate projects and sports events. This increased attention, coinciding with its emergence as a world business hub, has also highlighted human rights issues concerning its largely foreign workforce.
In 1990 Dubai was 15% the size of Singapore; in 2005 it was half its size and Singapore is no slouch when it comes to allowing free-market economics to rip. The economy of Dubai Emirate, which is considered the trade and tourism center for the Gulf region, has achieved a standard growth estimated at a rate of 16.7% in the year 2004.
Following the passage of the long-awaited foreign property ownership law in March 2006, a deluge of foreign money boosted Dubai’s ambitions. Europeans, including Russians, accounted for 20% of the buyers of all property categories. GCC, Arab nationals and UAE nationals make up 28%, Asians 40%, and Iranians 12%, according to figures from Global Realty Partners. The overall foreign ownership index of property kept by Colliers International soared 116% from Q1 2007 to Q3 2008. From 2002 to 2008, Dubai’s property prices almost quadrupled, and large-scale developments turned Dubai into one of the fastest growing cities in the world. Some of the biggest projects include Jumeirah Garden City (estimated cost: US$95 billion), Dubailand (US$64 billion), The Lagoons (US$25 billion), Palm Jumeirah (US$14 billion), and The World (US$14 billion).
Now if you go on the highway of Dubaiwith so many sign broad written “Wherethe vision of Dubai Gets Built.” Whichhave been written from a long time butno work is in process.
THE QUESTION IS WHY ? Where did Dubai go wrong ?
The Wall Street Journal reports that international "financial analysts are starting to wonder about the amount of debt the city-state is racking up." The article paints a picture of a city with dwindling oil revenues but a limitless appetite for growth. It places Dubais debt, relative to gross domestic product, at about 42%. Thats pretty high compared to Abu Dhabis debt of 2.9% of GDP. Dubais debt load is four times the average among other Persian Gulf states. Credit-rating companies are asking for more information to determine how sound the government really is. In the end, if Dubai gets into financial trouble it would take its neighbors with it. Or perhaps theyre counting on a regional bailout. Some are concerned that Dubai is doing what many in the U.S. did - overleveraging and spending too much with borrowed money.
BUBBLES What happens when markets are manipulated upwards (by whatever means), is that you can get a “bubble” which is where the price ends up a lot more than the “fundamental”. The next thing that happens is that there are “mal-investments” that only make sense at “bubble prices”. Then the bubble pops, and since bubbles are zero- sum, the next thing that has to happen is that prices have to stay much lower than the “fundamental” until all of the mal-investments are washed clean.
There is also another reason to be cautious when it comes to Dubai property - the boom in prices is a bubble waiting to burst, fed principally by speculative purchases. Late in 2004, Middle East Business media reported that 85% of off-plan flats and 50% of off-plan villas were bought by speculators, most of whom sell before completion. This means that most homes are secured by 10% deposits and then traded like shares. The majority of those buying have no intention of living there. Some Dubai builders already recognize the “fragility of this speculative frenzy” but may be too late in looking for larger deposits. “A global economic downturn or a local housing crash, or both, could turn this investment-led boom into a major slump.”
Up to early 2007 the price of housing (rentals and owned) had tracked the ratio of economic activity divided by the numbers of housing units, just like it does everywhere in the world. Sure interest rates are important but local interest rates hardly changed over that period. The UAE’s property market, which suffered one of the biggest crashes during the global crisis, is gaining momentum. House prices have fallen by around 60% from their Q4 2008 peak.
Then the global credit crunch hit. Amlak and Tamweel, the UAE’s two largest home finance companies, stopped offering new loans. The two mortgage lenders accounted for more than 50% of all mortgages in the country. Foreign investors suddenly disappeared at the end of 2008, as the global financial crisis hit the emirates. This caused transaction volumes to plummet. The overall foreign ownership index was 50% down by Q4 2010, from its peak in Q3 2008. Almost half of all the construction projects in the UAE, worth around AED1.1 trillion (US$582 billion), have been either put on hold or cancelled, in response to falling demand and deteriorating market conditions.
PROJECT LOCATION DEVELOPER VALUE (US$) STATUSJumeirah Gardens City Satwa district, Dubai Meraas Development 95 billion On holdMohamed Bin Rashed Between Al Khail Road Dubai Properties 55 billion On holdGardens and Emirates Road, Dubai Between Phase 2 of IbnNakheel Harbour & Tower Battuta shopping mall and Nakheel 38 billion On hold the 75-km Arabian Canal, DubaiMudon Development Dubailand Dubai Properties 21 billion On hold Along Dubai Creek,Culture Village Dubai Properties 13.6 billion On hold next to Garhoud BridgePalm Deira Deirah coastal area, Dubai Nakheel 12.5 billion On holdAl Burj Tower (The Tall Near Jumeirah Lake Nakheel 8.2 billion On holdTower) Towers and Dubai MarinaUniversal City Dubailand Dubailand 2.2 billion On holdAqua Dunya Dubailand Dubailand 1.8 billion On holdNad El Sheba Race course 5-km southeast of Dubai Meydan LLC 1.3 billion CancelledFalcon City Dubailand ETA Star 0.68 billion Cancelledof WondersDubai Within the Jebel Ali Airport City n/a 0.45 billion CancelledExhibition City
FIGHT BACK OF DUBAI PROPERTY Positive economic growth, strong government support, and mortgage lenders returning to the market are helping property prices stabilize, though local analysts are generally pessimistic about future price prospects. In an effort to help the market, the government has announced over AED165.25 billion (US$45 billion) worth of future projects, which includes investment in transport infrastructure. This is expected to create more jobs and increase demand for real properties.
FUTURE OF DUBAI PROPERTY MARKET Dubai is still seen as the premier place to do business in the Middle East and beyond. It is a preferred base for not just Arab but Pakistani, Iranian and even Indian businesses, due to the wider regions political uncertainty. Its reputation for liberal attitudes helps. Insofar as property is concerned, prices are on the “fundamental” now; they may go down a bit as the last of the developments get finished which will drive the fundamental down. After that, prices will start to rise, albeit quite slowly.