Peter J. Cooper’s Weblog

If the UAE is the last real estate market in the world to enter a correction then is it too optimistic to hope that it might be the first to come out of a downturn? My argument is that the inflationary effects of the multi-trillion dollar bank bailouts are not to be underestimated, and a rapid return to higher oil prices would likely put the local property boom back on track.

All the same it is quite obvious to any observer of the UAE property scene that this autumn has seen a boom turn to bust. In September Dubai villas and apartments were still selling for record prices, by October the market fell sharply, according to figures from HSBC. Dubai villa prices were down 19 per cent month-on-month, and apartments in the Dubai International Financial Centre dropped by up to 30 per cent.

The month of October began badly with the Cityscape Dubai 2008 exhibition that saw an almost complete failure of off-plan sales. Even in Abu Dhabi the off-plan buyers have been very thin on the ground this season, just six months earlier at the Cityscape Abu Dhabi people were queuing down the road to buy.

Global or local causes?

Looking at the immediate reasons for the crash the finger can be pointed at global and local factors. From a local perspective the boom became oversold with prices spiking to levels that were unaffordable, and then local banks became embroiled in the credit crunch and tightened up mortgage lending criteria. At the same time, global stock markets crashed in October and international credit markets froze, compounding the local downturn.

It is presently very tough to sell any off-plan or secondary property in the UAE, and the deal flow has slowed to a trickle. Dubai Land Department figures still look fine but the deals being registered today were concluded long ago.

Real estate developers have fired sales staff. They have been leaving anyway because commissions have dried up. Estate agents who were busy over the summer are now very quiet indeed. The shift from feast to famine for the sector has been frighteningly fast, and the endless double-page spreads of real estate advertising in local newspapers have gone.

However, the supply and demand fundamentals have not changed much in Dubai. Indeed, the rental market is tighter than ever because people are not buying and renting instead. It remains to be seen how long rents can continue rising if local firms begin to cut back staff and send them home in an economic slowdown. But such is the backlog of demand for housing that this could take some considerable time to become evident in the market place.

Demand big

One study of local housing demand published over the summer showed that upcoming supply barely met the forthcoming demand from the Dubai state and state-controlled companies, let alone the private sector. Groups like Emirates Airline have massive staff accommodation requirements, and for each new A380 super jumbo that lands in Dubai dozens of apartments will be needed for the flight crews.

It would take a really big slowdown in growth from such companies to put a serious dent in demand for housing. And this study did not even start to assess demand patterns from the private sector in Dubai, with many major financial institutions planning to move large numbers of staff into the city, or the impact of Abu Dhabi’s expansion where there is so far no new accommodation available at all.

In economic jargon this is called momentum. An economic boom of the type seen in the UAE since 2002 does not come to an end quickly, even if real estate sales grind to a halt. There is huge work-in-progress, and a massive amount of money committed, a great deal of it equity and not debt.

Debts lowish

Besides debt must be kept in proportion to GDP. The UAE has debt equivalent to around 50 per cent of GDP compared with more than six times GDP in the UK and 3.5 times in the USA. And the UAE’s debt turns to a net surplus when its sovereign wealth funds are taken into account.

Long-time UAE watchers compare the panic of October 2008 to the UAE stock market crash of 1999. Then as now Emaar Properties stock took a hammering. Investors thought the end of the world was coming, and sadly a few committed suicide. In 1999 some bankers left the emirates convinced that the real estate market was going into a meltdown. But the UAE recovered from the aftershocks of the Asian Financial Crisis very quickly, and the oil price bounced back from under $10.

1999 all over again

This correspondent lived through that period and experienced just how quickly the UAE economy can recover from what looked like a very serious position. Is it so different today? Admittedly the scale of the projects and the amount of over-building is more dramatic than in 1999 but then the UAE economy is that much stronger too after seven years of booming oil prices.

Help is also at hand from oil consumer nations whose response to the financial crisis this autumn has been a quite unprecedented series of bailout packages now totaling more than $4 trillion. The US money supply has more than doubled in two months. Even in the Great Depression of the 1930s money supply increases never went above 15 per cent. It just has to be hugely inflationary, and the time lag between stimulus and inflation is nine months to a year.

That will mean high oil prices will be back within a year, and the revenues that drove the UAE real estate ever upwards will return much more quickly than any body anticipates this gloomy autumn. Anybody dumping property now could live to regret it, as higher general inflation will carry rents and capital values higher at least in nominal if not real terms, as salaries will also have to rise sharply.

It is all too easy to move from being wildly over-optimistic about UAE property to being irrationally depressed, and to forget that we live in a world of rapidly changing economic circumstances. For UAE property the correction could be short and the upturn strong as it was in 1999. Economic fundamentals are all that count in the end.

When Dubai’s biggest mortgage lender Amlak Finance announced yesterday that it had suspended all new home loans, it is time to acknowledge what is quite obvious to any observer: the Dubai property boom has crashed. There are no sales, except at very distressed prices, and new project launches have flopped completely this autumn.

Eight weeks ago Dubai created a supreme financial committee to make recommendations on Dubai’s sovereign debt and the debts of state-controlled companies. The committee includes Amlak chairman and director general of the Dubai Department of Finance, Nasser Al-Shaikh, Emaar boss Mohamed Alabbar, UAE cabinet minister Mohammed Al Gergawi, Dubai Islamic Bank chairman Mohammed Al Shaibani and Borse Dubai chairman Essa Kazim.

Nakheel

It is perhaps strange not to see Dubai’s biggest state property developer Nakheel represented on this committee. Some might argue that Nakheel’s portfolio is the one most obviously in need of trimming back in the light of the challenging global business environment, and it almost certainly carries the biggest state debts.

Mr. Al Shaikh has told local media that the committee will not be looking after the private sector, and will be giving its recommendations directly to the Ruler of Dubai and UAE prime minister Sheikh Mohammed bin Rashid Al Maktoum. He said property projects that are under construction or announced would go ahead as planned but that Dubai may face some postponements in real estate projects.

The next 18 months are going to be difficult for Dubai but Mr. Al Shaikh subscribes to the view that Dubai can be last into the global real estate crisis and one of the first out. The outlook for oil prices, with a $4 trillion is bailouts and stimulus packages now announced, is bright and could quickly fuel up the UAE economy for a recovery.

Shake-out

However, a proper shake-out of weaker property development companies, and a rationalization of the state sector will be good for the long-term health of the Dubai economy which has been overheating with too many projects going ahead at the same time leading to pressure on construction material prices and traffic congestion, and threatening over-supply.

There is also a powerful triumvirate committee at the UAE federal level also examining how the country should reorientate its spending in response to the global financial crisis.

The task for the Dubai and UAE authorities is to quickly agree on a revised business plan and to implement it while other countries around the world dither and debate. Usually when a booming market is taken for reassessment it becomes very obvious which are the weaker and less economic projects, and which should be safeguarded as long-term winners.

Strong survive

An economy makes progress by letting the strong survive and the weak fail. Interestingly this is exactly the reverse policy to what is being pursued in many developing countries. Supporting weaker banks just makes it harder for the stronger ones to make profits. Bailing out economic basket-cases like US auto giants saves jobs today but costs them in the long run.

Let us hope Dubai and the UAE can grasp the nettle and sort out the good from the bad. It will not be an easy task, the losers are not going to be happy people. But you do not create a strong economy by supporting losers. You need to focus the available resources into the most economically productive areas of the economy and put the rest on hold for better times.

I think Dubai and the UAE will get that right by reassessing the value of projects to the long-term future prosperity of the emirates, and the sooner it is done the quicker the recovery will be.
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Did the Dubai Financial Market hit rock bottom earlier this week after shedding 68.5 per cent of its value? Certainly the 2,000 point barrier seems to have held as a support level and stocks have rebounded to 2,053 today, still 65 per cent down and way off the high late last year of 6,292. Investors are naturally feeling extremely upset and broke.

My Emirates Business 24/7 column at the start of 2008 warned of a negative year for stocks but there is reason to think that this could be the turning point. Certainly the 27 per cent plunge last week looked like a selling climax.

Selling climax

It was truly horrible and an SMS from the National Bank of Abu Dhabi proudly reported the 27 per cent weekly loss for its mutual fund, sometimes you have to wish technology was not so merciless, no human messenger would be so bold.

However, I saw a headline this morning which surely is the cavalry coming over the hill, a little late to prevent the massacre but on hand to help the survivors. Apparently Dubai is holding talks with the UAE government about low-cost funding for local firms.

Fresh money on the table is what is needed to stop the stock market meltdown, which has already gone into the irrational liquidation phase driven by margin calls. As I commented on this blog earlier in the week there is no rational basis for extreme pessimism about Dubai.

The worst that could happen is that every second tower is owned by Abu Dhabi after a bailout of historic proportions. But that is hardly going to be necessary. The UAE is not short of capital, and while Dubai’s spending will need to be scaled back, Dubai will have no problem servicing its debts.

Triumvirate

The Gulf News today reported the formation of a high level triumvirate to consider the strategic nature of projects now in progress and to decide on what is most important to save. That is a very sensible approach to managing a market correction, not a disaster.

Anybody with an ounce of common sense can see that the emirates is better positioned that almost any other country in the world to tough-out and even eventually profit-from the global recession. This country is like a person with debts on their credit card but twice as much on deposit at the bank, name another country in that position?

Panicking local share holders are their own worst enemy, just as in 1999 in the last crash. They are the problem not the local economy which will be the first in the world to bounce back from the current crisis and has been the last to get into trouble.

The Dubai Financial Market closed at a four-year low yesterday after a 17 per cent fall this week alone. It will therefore not be much comfort to investors to realize that a bottom must be close.

The obvious parallel is with what happened in 1999. Of course it was a different world then with an over-the-counter stock market and no trading floors in the UAE. Today there are three, the DFM, Abu Dhabi Securities Exchange and Dubai International Financial Exchange.

However, the pattern is very much the same. Oil prices tumbled below $10 in 1999 and brought stocks tumbling to the floor with stocks like Emaar Properties down more than 80 per cent from their peak values of around AED160 or AED16 when adjusted for share splits since then.

History repeats itself

Today Emaar is AED3.74, still above its 2000-2003 trading range of AED2.4, but a considerably larger company than at that time, and once again below net book value.

But investors should think back in time, and not that far. Less than a decade ago Emaar investors thought the world had ended - and for those who sold or had to sell it was - but the stock went on to deliver a 15-fold rise in price for anybody who held and sold at the peak.

I just think that has to be a message for investors who are about to throw in the towel and give up on Dubai. This is a dynamic emerging market and the upside can be as big as the current downside. All business problems can be overcome, this is a business cycle not a terminal illness.

On the other hand, the restless energy of stock market speculators is also a constant in history. They tend to go from extreme optimism to extreme pessimism. Now we are approaching the climatic phase of pessimism, known as the ‘error of pessimism’ because it gets overdone.

Villas boom

However, it will take a few years for local speculators to make good their losses and regain the confidence to enter the stock market again - no doubt when most of its gains are already made. In the meantime, I would expect some narrow classes of local investment to benefit such as completed villas.

Investors who managed to exit the stock market early on now have money, and others will not be putting their cash into the stock markets for some time. Where then to invest?

Local villas with restricted supply and steady yields offer a safe haven in this crisis, and could always be sold in the future to finance another foray into the stock markets.
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Far tighter mortgage finance this autumn is driving property sales down in the UAE. Abu Dhabi Commercial Bank told Emirates Business 24/7 that mortgage volumes have halved while applications are down from 35-45 to 15 per month.

ADCB has also increased its mortgage rates from 7.5 to 9.5 per cent and dropped its loan-to-value ratio from 90 to 70 per cent. The Emirates Inter-bank Rate (Eibor) has appreciated significantly above Libor, making UAE home loans particularly expensive.

It is the same story across the local banking sector. HSBC has cut LTVs from 85 to 60 per cent on apartments, and 70 per cent on villas. Lloyds TSB will only make loans on villas, and not apartments.

Low LTVs

The local mortgage companies Tamweel and Amlak have cut LTVs to 75 and 65 per cent respectively, and are in the process of merging their operations. Both raised their money in mortgage securitizations that are now virtually impossible in the current market.

Local liquidity has become very tight, as the UAE has suffered an exodus of cash from the falling stock markets and over the summer from revaluation speculators who have withdrawn their money. Ironically the Governor of the Central Bank said yesterday that there was now far more enthusiasm for the GCC single currency – and that could well mean a revaluation is back on the agenda.

However, the mortgage market in the UAE is very small by comparison with most housing markets of the world, and could indeed be the smallest. The majority of local housing transactions are made in cash, and so the tightening of housing credit is not the end of the world.

Boom over

It is, however, clearly the end of house price increases for the time being, and for people who want to sell out in a hurry then big discounts will be necessary. For off-plan apartments, particularly in the less central locations, it is probably impossible to sell at any price because the buyer will not be willing to take the risk of future price falls.

Whether it proves to be the case that the UAE is a case of last-in, first-out in the global real estate slowdown remains to be seen. A government initiative to keep credit flowing to the housing sector would seem necessary to avoid a true real estate crash in the emirates which would be damaging to the long-term interests of the country as an investment safe haven.

That said the problem is small enough and the solutions easy enough to implement for the government to avoid the kind of property meltdown now happening in developed markets. Indeed, the UAE could be in a position to attract new investment from these troubled countries if it plays its hand correctly.

Then the market shakeout of the next few months would emerge as a bull-market correction and not a crash, and those panicking and selling out for a big discount would look rather foolish.
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For all the gloomy talk about a property correction in Dubai, the local real estate market has withstood the global financial crisis far better than its more mature rivals, once upheld as a far more solid proposition. According to Dubai based consultants Asteco, villa prices were up by an average of 24 per cent in the past three months and apartments by 20 per cent. That just has to be the hottest markets in the world.

Asteco has one of the most extensive property transaction databases and its quarterly survey is widely respected, so this is not a question of an optimistic broker dreaming up some figures. Rental increases are slowing down, however. Villa rentals were up by 11 per cent in the past three months and apartments by four per cent.

Of course, October was a particularly quiet month for Dubai estate agents. Clients were glued to their monitor screens watching stocks plunge. This is hardly the moment to go looking for a property. But people were still buying. The Dubai Land Department continued to report a healthy flow of business and hence the price hikes for villas and apartments.

Mortgages halve, no collapse

There have also been concerns raised about the rising cost of mortgages and higher loan-to-value ratios. But the first point to note is that the majority of transactions in Dubai do not involve mortgages, and secondly that mortgages are still flowing. Mortgage transactions were down by a half in October, say insiders, but this is a cup half-full and not down 80-90 per cent as in the UK, for example.

It seems the continued population migration into Dubai is keeping the local property market alive in difficult circumstances, combined with a healthy desire by many new residents not to have to pay the city’s famously high rents. As the Asteco survey commented: ‘With more and more expatriates making a long-term commitment to stay in Dubai… many expatriates see buying a villa as a sound investment.’

Asteco noted that Downtown Dubai villas gained the most in the three months, and were up a thumping 61 per cent in value. Palm Jumeirah villas were up 42 per cent, Palm Jebel Ali off-plan villas by 39 per cent, The Meadows by 38 per cent, and Emirates Hills by 35 per cent.

The report expects Dubai house prices to level off and ‘not to show any major increase over the next two years’. The argument for buying therefore revolves around avoiding the very high rentals paid in the city and accumulating equity in property. It is an argument any resident paying rent will appreciate immediately.

US post-election rally

Other estate agents believe the market will show more strength this month as the hiatus in stock markets during October will have delayed some purchases by literally frightening people off big financial deals. There is also likely to be something of a relief rally in global capital markets in November with the US presidential election over and a feeling that stock markets might have passed their bottom.

Whether this proves to be more than a short-term relief in the global economic crisis remains to be seen. But it could mark the late start of the traditional autumn seasonal upswing in Dubai property sales, at least for completed homes available for immediate occupation, and that following from quite remarkable price gains over the past three months. That could mean higher prices or a consolidation of the recent price increases and higher sales volumes.

What seems far less likely is an early resumption of the dash for off-plan property that had come to symbolize the Dubai property boom, and latterly transferred to Abu Dhabi. At Cityscape Dubai 2008 held at the start of October the near absence of interest in off-plan developments, particularly in Dubai, caught many developers unaware.

And November opened with news of the repossession of the $3.5 billion Plantation project in Dubailand by the Dubai Islamic Bank, with off-plan buyers asked in a newspaper advertisement to ‘please contact the bank’. This is bound to be a further blow to market confidence in off-plan developments.

Off-plan out, completed property in

Is it now possible that the completed property market could become entirely divorced from off-plan, with the former continuing modest price advances, while the latter undergoes a serious shake out, consolidation and correction. That is what seems to be happening down on the ground in Dubai property today, with the flow of new migrants strengthening the price of property that is completed and available for immediate occupation.

This is worrying for the many off-plan owners of partly completed and un-built property across the emirate, and it is impossible to generalize about the outlook. Well-financed developments with stable developers and good contractors will deliver more or less on time and to specification. There is no cause for a general panic, especially as completed prices seem to be weathering the global financial crisis with distinction.

However, where people have put down a deposit on an off-plan property with the expectation of ‘flipping it’ to a buyer before the next payment became due, there is a problem as there are now no buyers. These individuals will have no alternative but to ask for their deposit back, and currently they will get 70 per cent and that is much better than in countries where a deposit is forfeit.

If developers suffer from a great many off-plan cancellations then they will have to ask for permission from the Real Estate Regulatory Authority to combine schemes until they arrive at an economically viable project. That would doubtless annoy buyers who had chosen specific apartments but RERA rules make it quite clear that specifications have to be followed or appropriate compensation paid.

Investor protection

This is of course only applicable in the worse case scenarios, and it shows the degree of investor protection now on offer in Dubai real estate. For most off-plan projects buyers will find that their apartments are delivered as promised, albeit with delays usually standard these days, and that the demand for payments follows as scheduled, although developers may turn out to be a little more lenient about late payments if the market gets tougher.

Further-out the $4 trillion dollar bank bailouts of October may deliver a bout of inflation for the global economy later next year which will support higher oil prices. Under that scenario Dubai house prices and rents will rise yet again. Villas look winners, particularly completed ones. Off-plan apartments in poor locations look like the losers.
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