149 comments I hear and see the question both asked and answered on increasingly numerous occasions. Much of the world has gone through and enjoyed a period of excess for a number of years. As soon as things went wrong people blamed the Governments, in turn Governments blamed the Corporations, and then Corporations blamed both the Governments and the people; but in truth large proportions of all were to blame.
There was a dramatic collapse that brought things to a head, and its severity brought a real sense of fear and dread to many when major companies and countries economic survival was, and in some cases still is, threatened. Whether the world has overcome the worst and is now embarking on a period of slow and sustainable growth is another question on people’s minds. The talk is of ‘double dip’, and as I write this, we have had a net fall on the stockmarkets this last week which of course means, for today, many are in fear and commentators are talking of ‘the double dip’ being even more likely. Just last month, when we had good corporate earnings results, it was seemingly ‘apparent’ that we were not heading for that same ‘double dip’. With so many experts split on their opinions, it seems apparent to me that whether the path is ultimately toward a double dip, or not, is unclear and the future uncertain. So what has all this to do with Dubai property in any case? Or am I just getting side tracked and losing the will to stay ‘on-topic’?
Well, there are lots of properties in Dubai (yes, I have done my research), and these residential areas such as The Palm, Downtown, The Marina, Victory Heights, Arabian Ranches and so forth were not set up for Emiratis or, for the most part at least, other GCC nationals. These areas have been built as residential, holiday and second homes for expatriates; foreigners from all over the World who are meant to populate this land in search of sun, sand, lifestyle and above all for most people, significant tax-free earnings. A high number of these foreign property owners were expected to live here and an equally high number would be using property as their second home for purposes of vacation, business or both.
I am sure that at times, we have all asked the question, even if it were just quietly and to ourselves, “who ‘on-earth’ is going to fill all these apartments and properties?”
Well for me, right now, it’s all largely about numbers; sheer numbers of properties, diminishing numbers of businesses and hence end users, low numbers of investors believing in or trusting the market and then the intention & necessity for Countries, Companies and individuals to look after problems back at home.
Few people were convinced all these properties would be filled in any case. With people losing money and needing to protect their main homes and businesses in other parts of the world there are less people with the money or the will to make these kinds of acquisitions. This reduces the demand, fewer buyers reduce the firmness of the price and in turn this reduces its investment appeal, and this in turn reduces demand further.
Dubai Inc. is clearly focused on things other than its property market and its expatriate workforce. It has significant known debt problems and I am sure it’s banks have, as yet, considerable unknown debt problems, certainly undisclosed debt problems; in relation to both property valuations versus mortgage debt and also in relation to arrears from non-payment. Dubai is looking after itself, fighting for its own survival, and those foreigners who are getting mistreated in despicable ways by developers and banks alike are, at best, a long way down its list of priorities. You could argue that this is the right thing for Dubai to do, if its survival is at stake then Dubai has to make sure it survives and look after itself; but it is obvious that the way foreign investors have been and are being mis-treated, such as those Palm Jebel Ali owners, there will be a great number of people who will never return to Dubai following the experience, and for those that do, they will not trust it and will certainly be wary of ever buying property within it. So Dubai is looking after itself and investors are learning harsh new lessons about what can result when investing in a foreign land.
Let’s face it; Dubai is not the business centre of the world. Dubai is a great trade hub, it has grown so quick and its free trade systems and enterprise gave it the march on all other local rivals. Dubai is, however, not London, New York, Hong Kong and neither is it Shanghai or Beijing. It is a local & regional trade hub. This means that companies from around the world, when times were good, wanted to have their Middle East office here as a base for the area and as a gateway to the East from the West or indeed vice versa. These global corporations and international companies have all experienced varying degrees of ‘tough times’. Money, for most of them, has been lost back in their homelands & HQ’s and in such circumstances it is natural to cut back costs, scale down and look after the core business back home. Some companies have closed offices here, others have just scaled down future plans and reduced employee numbers; but in either case it means less foreign workers here. Again, some of those employees leaving Dubai in those cutbacks will have owned property here and if they were lucky enough to own a completed property in an area popular enough to liquidate, such as Palm Jumeirah, then they will have experienced perhaps a 50% loss from the value they had prior to the fall. If they owned less popular property in areas with less demand than the Palm then perhaps they still have not sold, or perhaps they sold at a greater loss than 50%. If they had their money in a project that was still being built then heaven knows what has happened to their investment, many of them may not know even now I guess, and sadly for some, the investment will be lost as developers duck and dive and act unethically so they no longer have to honour commitments. So with businesses leaving there are less numbers of people here in Dubai and the property experience will put off both former participants and the many spectators from getting involved again.
Investors used to see that there was money to be made by investing in Dubai property, and I don’t think it is a revelation to say that investors were driving the market here. Once the Dubai property market loosens its grip on the remaining investors, and eventually spits them out, most will have nothing left to invest. Of those that remain with funds, most will not be investing back into this property market, mostly because they will know there is not much money to be made, certainly not like their used to be, but also because they will not trust it. Of those looking on from outside, they are unlikely to see Dubai as an opportunity to make money. Others consider the Govt to have shown its colours of how low it will stoop to behave in tough times, and few will want to invest here for that reason. So with fewer investors around, and few, if any, of those willing to buy property here in Dubai, just WHO will create and drive the market? End users were never the driving force behind prices here, and end users right now, are just sitting on the sidelines and watching prices fall further. When end users do start buying they will represent a small percentage compared to the many thousands of properties they are expected to fill - depressing isn’t it!?!
So where now? Well, the above all sounds fairly dismal and damning, and righty so. Despite that, there has to be a way forward, and whenever there seems not to be, one will develop regardless of what anyone predicts.
At present there is more fear than expectation with perhaps worse still likely to come.
One likelihood is that end users will herd together in the better developments and there will be a flight to quality. This should mean those developments such as Palm Jumeirah, Downtown and some parts of the Marina will be where there is most demand and this is where there should then be enough transactions to create something resembling a market. Within the aforementioned master developments there will be a varying quality of sub-developments & buildings. These key quality developments will naturally be most sought after, and within these there will be projects, key units with key locations & views that are most sought after again. Although the key apartments within the key developments will always hold prices at the top end of the ‘market price range’, the sheer number of available units will set a ceiling on just how high these prices may go.
We are seeing this flight to quality beginning to happen to an extent. In Tiara Residence on Palm Jumeirah, the 2 favoured end buildings on the top row of buildings, namely Aquamarine and Diamond, are the buildings where ALL of my 2010 transactions, up to the time of writing, have taken place. Quality views and the perceived value & kudos of being in the best buildings has kept trade buoyant and prices quite high compared to market prices per square foot elsewhere on The Palm. For those apartments that are currently not at the top of the ‘most desired’ list, such as shoreline apartments at the rear of the left hand side buildings which look over the mono-rail and waste areas between it and the Golden Mile apartments, owners selling these less favoured units are having to go fishing for buyers with the only tool they have, and that is price reduction. Attracting a buyer for a less favoured unit in the current market means that the seller has to apply a significant discount.
Rather than talk about the whole of Dubai where many varied scenarios exist for properties deep in the desert and those that are still to be completed, let us look for a moment at Palm Jumeirah. As far as Palm Jumeirah goes, it will soon matter very little what development you are in, IF Nakheel do not start to carry out basic maintenance on The Palm and implement a series of basic infrastructure improvements and aesthetic enhancements soon. It is currently dangerous to walk along the shoreline pavements in many areas as the condition of the pavement is poor and if you overcome that then you risk getting run over because you can’t see past the overgrown foliage. The door handle to the beach club and restaurant entrance between buildings 9 and 10 has been ‘missing’ for a few months and Nakheel, the company that we are depending on to maintain roads, build new villas, keep the Palm above sea level, monitor marine and environmental issues and build a massive shopping mall, cannot afford a new door handle. I even noticed traffic lights out for a few weeks before they were replaced – perhaps they had to go out to tender for a few bulbs? Or perhaps they just take some from off of the Sheikh Zayed Road? If 2 years of maintenance is neglected then to catch up does not take 2 years of time and 2 years worth of money; to catch up 2 years of neglect may take 5 years worth of money and the same number of years in time. Some items when left unmaintained can be become unmaintainable and require replacement, and costs increase and the matter can escalate out of control. The state of repair of the shoreline buildings appears visually disturbing. I do not know if they are structurally at risk. What is happening with the land that juts out from between the shorelines toward Sheikh Mohammed’s private island? It was planned to be the ‘jetty’ for the QE2, but that is not going to happen now, or so it seems, so does that land just stay there? Why have it there at all, why can it not just be taken away back into the sea, or just pave it and put railings round so it is somewhere for families to walk in the winter, and it will also make it more aesthetically acceptable too with the ground still intact if they really were determined to develop it later on.
I used to think that if Dubai wanted to participate on the world stage and wants to remain at least close or in the queue to the top table, then The Palm would have to be a ‘stand out’ development that was superbly looked after and made to be outstanding. Dubai’s apparent complete lack of interest in The Palm and all the issues happening on it make me doubt that Dubai is at all bothered about it. Dubai could take 10 years to undo all of its failures and broken promises during this down turn, and that’s for those who have an open mind and are flamboyant in attitude. Those institutions who, due largely to reasons surrounding lack of transparency resisted investing in Dubai during the boom years must feel vindicated now, and rather smug, they deserve to feel pleased for they have been proven right to have been cautious whilst others took the easy short term money on offer and joined in. How much convincing will these institutions need now in order to come on board next time? And if The Palm is left to falter, and fail, then will Dubai ever recover? If The Palm starts to trade at prices 50% down from where they are now then it will be a failure. The people who will then afford to be able to buy a Palm property, without being rude, will not be the sort of folk that high net worth buyers will want to live adjacent to and they will also not spend anywhere near the money that Dubai needs them to be spending in order for it all to make sense – from that point, my view would be, that we will have then reached the point of no return.