Learning From The Mistakes Of The Dubai Bust

Ronan McMahon discusses the rampant speculation of the Dubai housing bubble that ignored the fundamentals of real estate. Some investors were so caught up in the irrational exuberance that they didn't stop to think about whether people would actually want to rent their properties. See the following post from Pathfinder International for more on this.

I never quite got Dubai. I haven’t been…but I never understood how it could make sense for us real estate investors. I’ve been pitched real estate opportunities in Dubai more times than I care to remember. I never took real estate in Dubai seriously, viewing it as a curiosity. I always sought out the Dubai booths at real estate exhibitions. They were usually entertaining and completely surreal.

Dubai was full of “cool” things…like golf in 120- degree heat, or skiing in a shopping mall. How could we resist? It made sense that Dubai would be Las Vegas, Wall Street and your dream beach resort rolled into one. Didn’t it?

Not once during these pitches did I get a rational case for why I should part with my money. The argument (delivered by a cartoonish used-car salesman character) was always the same. Prices rose by 25% in the last six months, and prices in one project or another were increasing by 15% the next day. Oh…and David Beckham and half the English soccer team have houses here. Of course, this was all made up, and the celebrity names associated with Dubai were paid ambassadors.

There never was a real market…speculators just bought pieces of paper (pre-construction contracts) in the expectation that they could find a bigger fool down the track. 100,000 people from the UK and Ireland alone bought real estate here. Where were all the people who would live in these shiny new condos going to come from? The frenzied crowds of buyers, however, never stopped to ask. They were blinded by greed.

Now, according to The London Times, close on 400 building projects with an expected development value of more than $300bn have stalled. They report that property prices have tumbled by around 60%. A price fall of 60% understates what I hear from contacts. I’ve heard anecdotes of people selling for as little as 20% of the original price of their property. There is no market, so to sell a property you almost have to give it away.

Expats are driving to the airport, abandoning their cars, and getting on the first plane out of the country. Many have lost their jobs…selling shiny new condos, or selling cocktails and champagne to the condo salesmen. In Dubai, if your rent check bounces, you will be locked up in jail. Missing a rent, mortgage or other payment is serious business here. So many are simply leaving Dubai.

Dubai is now in default. Despite repeated assurances that everything was ok, Dubai has now said that they need more time to pay back the folks who have lent then money. Truth is this doesn’t matter a hoot for the real estate market there. It’s been dead and gone for the past 18 months. This will just be the final nail in the coffin.

The lesson we need to take from all this is a timely reminder that we always need to understand who the end user for a piece of real estate will be. If you are buying pre-construction, who will rent or buy your unit from you on completion? How much competition will you have with other vendors or landlords? How will demand measure up with supply?

In the case of Dubai, the question was whether they could build a major financial and tourism/second home destination from the sands of this tiny emirate. I never understood why someone would want to spend time there. There are much nicer places to golf, ski, lie on the beach or go shopping. Dubai just never made sense to me.

Those who applied these most basic of rules could see that there never was a market for all these shiny new condos…that there was never a true real estate market. There was only the hope of finding a bigger fool. Now even that is gone.

This post has been republished from Pathfinder International, an international real estate analysis site.

Real Estate Biggest Gainers And Losers In The First Quarter

Despite the global financial crisis some countries have managed to show small growth in their real estate market while others have tumbled significantly in the first quarter of 2009. Which countries have managed to overcome the global economic turbulence? The following article by Overseas Property Mall takes a look at the biggest gainers and losers of the first quarter and a housing outlook by Knight Frank Global.

The Q1 Knight Frank Global House Price Index 2009 hasn’t shown surprising results in the scheme of the global financial crisis. Some of the key highlights has seen Israel as the top performer with a 10.9% growth rate, followed by the Czech Republic with 9.9%.

On the contrary, the worst activities were seen in Dubai, Latvia and Singapore. Dubai recorded average price falls of 32%, Singapore 23% and Latvia 36% loss. On a quarterly basis, Dubai was the biggest loser with -40%.

In terms of best performing markets, Thailand with a 2.7% lift in values, Israel with +2.6% and Switzerland with +2.1% were showing promising results.

However, according to the Q1 report, a full 30% of the sources usually reported on had not returned their Q1 data at the time of writing the Knight Frank Global House Price Index.

Despite some of these markets having seen a rise in values, economists believe that the outlook for the global markets is still grim. Head of international research, Knight Frank, Nick Barnes said:

The world’s housing markets remain under intense pressure with little real evidence of any of the hoped for ‘green shoots’ and even the improvement in performance shown in some countries in the last quarter may yet turn out to be a false dawn according to some commentators. Recent projections from the Organization for Economic Co-Operation and Development (OECD) do little to promote a more optimistic viewpoint – GDP growth is forecast to drop by an average 4.3% in the OECD area in 2009 while by the end of 2010 unemployment rates in many countries will reach double figures for the first time since the early 1990s.

The inescapable trend is that the worst and most widespread economic recession since the 1930s continues to batter housing markets across the globe. Rising unemployment and concern among those still in jobs, added to constrained credit conditions, means that buyer demand for housing remains suppressed and confidence is low in most markets which is inevitably having a negative impact on house prices. There is sporadic evidence of buyers snapping up relative bargains, however of those buyers in a position to move, many are still waiting for clearer signs that markets are approaching the bottom of the cycle. Moreover, in a falling market, sellers are usually forced to a greater or lesser extent which means that opportunities to buy are greatly reduced and transaction volumes correspondingly low.

Against this backdrop, it is perhaps unsurprising that of the official sources used in the Knight Frank Global House Price Index, 14 (equating to 30% of the total index) had not reported Q1 data at the time of writing this report. We can only surmise that the data collection bodies have either been unable or unwilling to publish the data to timetable – perhaps a reflection of the ailing health of their respective residential property markets?

Of the first quarter data which we have received, Israel was the top performer over the 12 month period ending Q1 2009 recording growth of 10.9%, followed by the Czech Republic at 9.9%. The better performing markets tend to be smaller and with fewer structural imbalances. The worst performers were Latvia and Dubai who recorded a fall in average prices over the period of, respectively, 36% and 32%. Singapore also reported a hefty 23% drop in values while a further five countries also returned double digit declines.

On a quarterly basis, 69% of the countries from whom we received Q1 data reported a drop in prices compared to 82% in our Q4 2008 index. However, on an annualized basis, 72% of countries showed a fall in values compared to 59% in Q4. Given the high proportion of “absentees” for Q1, however, it would be potentially misleading to jump to too many hasty conclusions, although over half had shown annual and / or quarterly price falls at the last time of reporting. Nonetheless, the shorter term future direction of most underlying economies suggests that the world’s residential markets are likely to continue to suffer for some while.”

The UK saw a loss of values of - 16.5%, followed closely by the U.S with -16.9%. This resulted in a rank fall of 10 places from Q1 2008 to Q1 2009 for the UK and a respective loss of 4.5% year-to-year.

Biggest price rises, first quarter 2009

1. Jersey up 5.6%
2. Finland up 4%
3. Thailand up 2.7%
4. Israel up 2.6%
5. Switzerland up 2.1%

Biggest price falls, first quarter 2009

1. Dubai down 40.0%
2. Singapore down 16.2%
3. Estonia down 9.9%
4. Norway down 6.2%
5. Denmark down 6.1%

To see the full list of ranks click here.

This post can also be viewed on overseaspropertymall.com.

China Beginning To Use Monetary Leverage On U.S.

While the U.S. has racked up trillions in debt, China has been buying up this U.S. debt. Now China owns more U.S. debt than any other country on the planet, and of course with that comes a great deal of political power over the U.S. China owns so much of our debt that if they were to start selling it off in mass quantity it could collapse our entire financial system. China has not said that they have any intention of doing so, nor would it be financially wise for them to, however, the threat alone carries a lot of weight. One of Obama's campaign claims was that he intended to fight China's monetary manipulation, but with little surprise — after urging from China — the U.S. backed down. Now China is urging the U.S. to be more prudent with their stimulus spending — in order to protect the value of their investment. Kathy Lien dives more into this story in her blog post below.

According to the latest data from Treasury, foreign investors were net sellers of U.S. dollars. The Madoff scandal led to a tremendous amount of liquidation by hedge funds in the Caribbean and Luxembourg but we have our eye on China. The Asian Giant continues to be a net buyer of dollar denominated investments, albeit at an increasingly sluggish pace. For the third month in a row, China has slowed their purchase of U.S. dollars. There are many reasons why their demand for dollars is waning, but don’t expect them to become net sellers of U.S. dollars anytime soon ahead of the Treasury’s report on Currency Manipulation next month.

With a month to go before the report is due for release, China is flexing their muscles. This weekend, Chinese Premier Wen Jiabao signaled to the U.S. that they are fully aware of the power they have on the U.S. economy and how the U.S. needs China just as much as China needs the U.S. He said that “we lent such huge funds to the United States, and of course we’re concerned about the security of our assets.” If China decided that U.S. investments are no longer safe, their liquidation would drive yields significantly higher and stocks significantly lower. The consequences of infuriating China are severe because they have the power to retaliate.

China’s continual accumulation of U.S. Treasuries is also political. With a growing U.S. deficit, there are much better ways for China to spend their money such as investing in resource companies. The sharp decline in Chinese exports also automatically reduce their need to weaken the Yuan by buying U.S. dollars. However for political reasons, the Feb and March TIC data should continue to report that China is a net buyer of U.S. dollars.

CNBC VIDEO: Is US Debt Still Desirable to China?

This post can also be viewed on KathyLien.com.

Dubai: The Anti-Cancun

For everyone else who is sick of hearing the phrase, “What happens in Vegas, stays in Vegas,” here’s a new one: “Whatever happens in Dubai, might make you stay in Dubai...for a long, long time...against your will.”

Dubai has certainly arrived as the next big thing in the minds of some, but even they might agree that it’s only the next big thing for now. Billions have been spent in an attempt to make the city a cosmopolitan metropolis with every amenity and frivolity imaginable. But even genuine marvels like the Palm Jumeirah have already become a bit gimmicky, and the Babel-like towers seem to be only the issue of an international “You show me mine, I’ll show you yours” game that will rouse not awe but giggles from future generations. Then there is Lyon-Dubai City: a scaled down replica of Lyon, France...in the middle of the desert. I think we’ve officially lost the substance by grasping at the shadow, to take a line from Aesop.

Ultimately, the spectacle remains a veneer for a traditional culture that has not much changed...and that’s just dandy. No one has the right to insist that Dubai abolish its repressive, extravagant, theocratic oligarchy—heaven, forfend!—but the leaders need to realize that there are consequences to being culturally obdurate when at the same time pushing to be an international hub. It’s lovely that they feel so compelled to maintain the decency and dignity of their own citizens—simply lovely!—but it’s a shame that the same can’t be said for the decency and dignity of the thousands of immigrant workers who have died in inhuman conditions during construction of the city’s architectural wonders.

I should add that the scandalous reputation of Western tourists (particularly those of countries who have colonized other countries) is frequently valid, and I applaud when one nation resists becoming the outhouse/brothel of another. We do not need another Vegas or Bangkok or Cancun or Amsterdam or Macau where anything and everything goes. But then, neither do we need an indoor ski slope, underwater hotel, nor islands shaped like the continents , especially if the phrase “anything goes” in Dubai is best applied in a sentence that also contains “justice” and “out the window.” So what does Dubai have to offer to keep investors interested and what are they doing to keep people coming back?

If some of the recent press that the city has received is any indication, the powers that be are either not committed to keeping people interested, or they think we’ll all just convert to their method of doing things. That would be a tad hubristic on their part (but these guys aren’t exactly known for their humility), and in order for Dubai’s reputation as a cosmopolitan and commercial Mecca to last, they need to keep negative PR to a minimum. So it boggles the mind that the city is actually trying to bill itself as a place for romantic resorts when one reads stories like this one from the BBC about a pair of Britons given a “light sentence” of three months jail time for getting a little too snuggly on the beach. Here is what the article says about their case:

“The pair were arrested on Jumeirah Beach hours after meeting at a champagne
brunch at Dubai's five-star Le Meridien hotel.

A police officer told the court he had warned the pair about their inappropriate behaviour, but returned later to find them having sex on a sun lounger.

Palmer, who was sacked from her job in Dubai as a publishing executive after her arrest, said in a statement she and Acors had been "just kissing and hugging".

Mr Matter said witness statements, including one from the police officer, were "wrong" and medical examinations had proved Palmer had not had sex on the beach.”

Let’s see here...salacious, witch-hunt style witness reports or hard medical evidence. Pardon me for seeming biased, but I think I’ll side with the Britons on this matter, even though I agree that such gauche public displays of affection are deserving of some sort of punishment.

Of course, this is hardly the worst case we’ve seen from Dubai; last July we saw the case of 15-year old French-Swiss citizen Alexandre Robert, who was kidnapped and raped at knifepoint in Dubai by three Emirati men (one of whom is HIV positive). When he didn’t smother the story, as perhaps some authorities had wished, he was threatened with a jail term of his own for engaging in homosexual activity—that is, the rape itself. After a major legal battle, Alexandre was not charged and his attackers were convicted, but not before French president Nicolas Sarkozy himself became involved. For the ghastly details, read this archived Time article.

Dare I draw a comparison between Dubai and the Neverland Ranch? Isn’t Dubai where Jacko is holing up currently?* Dubai may not be positioning itself as the next resort town or even the world’s next commercial capital. Nay, it almost seems to be a new utopia for people with wealth enough to live above the law while others are crushed beneath it, which is not the image one wants in this capricious world where entire cities can fade from relevance almost overnight, no matter how many water slides they have. And with increasing reports of corruption in the Dubai real estate market coming to the forefront, investors may not even feel that their money is safe there, let alone their physical person.

*(Update: Jacko has recently been spotted in Vegas...in a mansion...across from an elementary school. So we can all relax, now...)

So in the end, what shall Dubai become? A megalopolis-sized Neverland Ranch? A more innocuous Anti-Cancun? Or the global pinnacle of commerce and technology, as its leaders have hoped? No one can say, but I will venture a guess that if the Rat Pack were around today, they would not be crooning immortalizing tunes in Dubai’s honor. However, I’ll send you off with what they might have written, were they still around, sung to the tune of Arriverderci, Roma:

Arriverderci, Dubai
Goodbye, goodbye Dubai
City of a million condo towers,
City of a million wilted flowers,
Where I was detained by the ruling powers
Far from home.

Arriverderci, Dubai—
my regards to the Sheikh:
the one who bludgeoned me for my rejection
of his amorous advances without protection.
Please let there be some form of extradition
on the books.

(Arriverderci, Dubai.
It’s time I made a break... Stuff the wedding bells; I shan’t be returning.
Keep your handcuffed arms outstretched and yearning.
Please be sure the flame of love keeps burning
at the stake.