Wednesday, April 07, 2010

Return in a time of Crisis?

I have been absent since GITEX 2009. This blog was about things that I saw here and found interesting, but which (I hoped in vain) no one would find insulting or offensive. And, since GITEX, I haven't seen a lot that was new that I found interesting but which, I thought, no one could possibly find offensive.

However, someone (in a comment) asked about Dubai and the crisis.

The Nobel Laureate Prof. Krugman has not written about Dubai, but he has written about Greece (folly) and Spain (innocent victim). I was inclined to put Dubai into the Andalus (i.e. Spanish) category, but, of course, it included both folly, and innocent victim.

Dubai is at a good location for trade between East Asia and Europe. So people wanted to come here, and were happily queuing to pay astronomical rents of $3 per square foot per month. Meaning, $3,000 per month for a 1,000 square foot flat, a price that would seem appropriate to high in New York or London. A 'normal' return of 7% per annum would make a reasonable price about $500 a square foot, or a cool million dollars for a modest 2,000 square foot villa.

Meanwhile, in the US, people were getting mortgages with payments of less than the interest on the loans, with no income and no money down. The banks immediately sold these mortgages as AAA+++ securities with absolutely no risk (as certified by all the rating agencies), since property values only go up, and these CDOs were backed by property that would appreciate enough to pay off the mortgages, even though the borrower had absolutely no money. The reduced payments were about three times as much as the cost of renting the property (which is why US home-owners are desperate to leave their homes and reduce their payments by 70%, only this would ruin their credit, and would have tax consequences that would put them in gaol for tax evasion). So all loans stopped all over the world.

Meanwhile, in the UAE, any Citizen can hire any ex-pat to do any job. The ex-pat gets a 3-year residence visa, and the Citizen gets the job done. So HH Mohammed bin Rashid, the Sheikh of Dubai, offered 3-year 'employment visas' to anyone who bought one of his properties. And people bought, since the prices were fully supported by the rents (meaning, it was cheaper to buy than to rent), plus the 'employment visa' was a big advantage to the buyers, making trips to Dubai much easier, since there was no longer a visa hassle.

But property investors only made a small down payment, and Dubai prudently borrowed money only to build the properties the investors had ordered (so the collapse of all credit made Dubai an 'innocent victim'). Except for Nakheel, which started work on spec on three developments that had few investors: The Palm, Jebel Ali, The Palm, Deira, and The World. Which were all at least partly folly, with 20/20 hindsight. (I enjoy telling my English acquaintances that England has filed for bankruptcy, based on the fact the the England part of The World has done so.)

So Abu Dhabi bought up all the Dubai notes, and said Dubai could not issue visas to property investors, except for a 6-month visa to investors after they'd purchased their property. Investors could neither live in their properties, nor rent them out, unless they had a job working for a Citizen, and investors who could pay $5 million for a flat in the world's tallest tower were not going to take jobs as bricklayers for a Citizen, so they stopped paying, and Abu Dhabi bought up their notes and foreclosed.

Dubai still remains a major shopping destination. I went to the Dubai Mall last weekend, and it was so crowded I couldn't find a place to stand.

But the profits Dubai earns on shopping are minuscule compared with the revenue it once got from selling freehold, and buying Dubai freehold no longer makes any economic sense, given the new laws, except for Gulf Arabs, and even for Gulf Arabs, it is premature to buy now.

My best guess is that Dubai will stabilise in a state like that which existed 10 years ago, before the freehold boom.

I should mention that the shoppers I saw in Dubai Mall were mostly from the MENA, but with a contingent of about 20% from Europe. So the shopping in Dubai remains much better than other MENA destinations, and seems likely to continue to attract and serve shoppers, just as it did before the freehold boom.

And I still maintain that the Dubai freehold boom was not a bubble, but was (mostly) an innocent victim of US Presidents Clinton, Bush, Jr. and their idiotic economic policies.


Anonymous fibber said...

Welcome back. Glad to see that you are in good health and nothing unfortunate has befallen you! Of course it won't just be the World version of England that will soon be bankrupt.

10:00 am  
Anonymous Jaddaf said...

Crisis is like a bubble.Every thing should be done from investors angle.Now recession is slowly evading.Real estate market will improve slowly.

1:32 pm  
Anonymous Rootless said...

I have missed your posts terribly and been checking to see if/when you would resume. I even asked you to comment on the Dubai debt debacle. But, as glad as I am to see you posting again, I must confess to finding this piece both confusing and confused. It is far too simplistic - and kind - to paint the Dubai real estate bubble as the inadvertent by-product of misguided US policy. Most of the disaster was brought on Dubai by misguided local policies (or lack of them). Too many to list but certainly enough to make laughable the claim of innocent victimhood. For a start, did nobody ever add up the total number of approved projects and ask who was going to live in these places? And what about the obvious, well-known and completely over-looked (or even protected if you had the right name) fraudulent activities by prominent figures in the local real estate industry. Nobody required Dubai to go on a building spree after all....

10:46 pm  
Blogger Haroun El Poussah said...

"Investors could neither live in their properties, nor rent them out, unless they had a job working for a Citizen"

where on earth did you get this BS from?

5:20 pm  
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