Friday, September 08, 2006

Property Crash???

A friend told me that rents are declining in Dubai. I personally haven’t seen any decline, but everyone seems to be wondering when the Dubai property bubble will burst. Farook, a real estate agent, keeps saying that the Emaar, Nakheel, and Dubai Holding properties are all overvalued by at least 90%.

Normally, property doesn’t suffer the extreme declines seen in stocks, or at least it isn’t possible to observe the extreme declines.

When the amount offered for stocks drops by 60%, there will still be sellers, and one can observe the price at which the shares trade; however, when the amount offered for properties drops by 10%, most sellers will hold out, hoping for a rebound, so the properties don’t trade until the price rises.

Last week, the Gulf News had an ad for properties at ‘15% below market value.’ Is this a first sign of a decline?

The Gulf News also has a columnist who says that he has been here 20 years, and rents have usually gone up every year, have occasionally remained stable, and have never declined. However, I spoke with another long-term resident, who said his rent was cut 15% in 1990. And 7 Days had a story that said landlords should be ‘very afraid’

With an unexpectedly mild hurricane season, and assurances from China and Japan that Iranian oil will find its way onto the world market regardless of what the US does, oil has finally dropped below US$70. With most of the world’s wealthy, energy-consuming population now enjoying a clement fall season, and with their summer driving over, demand for oil should remain low until the winter heating season some three months away, so oil could drop, though OPEC has pledged to keep the price above US$65.

If OPEC fails to keep prices up, as it has often failed in the past, the volume of US$ pouring into the region will decline. Consequently, the volume of people desperate for venues in which to park their oil money will decline as well.

Meanwhile, I’ve read that between 150,000 and 250,000 new housing units are scheduled to appear in Dubai before the end of 2007. Since developers here are almost always late in delivering units, the number actually appearing in 2007 will certainly be less than the number promised, but there will still be a large number of units, many purchased by speculators with a small down payment. Before, speculators needed to put down the balance of the sales price if they hadn't found a buyer before the property was completed, but there is now an active market for mortgages, so the amount of cash needed to hold a property is only the monthly payments. Until the banks get nervous. And even monthly payments will be difficult to maintain if units are sitting vacant.

Right now, The Dubai Marina is said to be mostly empty. It was possible to purchase with a small down payment, but the full sales price was due upon completion. No one understands how the speculators are able to sit on their (empty) properties, unless they are not speculators but investors from the Gulf who used oil money to buy the properties for cash (or wasta), and are currently using the properties as a repository for part of their wealth. So prices might not be under the pressure one would expect for an empty development.

On the other hand, The Meadows and The Springs are mostly occupied. I rode through The Meadows and The Springs in summer, 2005. Many units had For Sale or For Rent signs. I rode through the development a week ago, and saw only two such signs. Prices and rents for The Meadows and The Springs rose more than 60% over the year, but honest landlords, limited by a 15% cap on rent rises, cannot raise rents to market levels. This means that, if rents stabilize, continuing tenants can look forward to a 15% rise next year. And continued support for current prices.

But if 250,000 new units really are coming on the market, it's hard to see how this support can continue unless a lot of upper middle-class people immigrate to Dubai.