What goes down must go down further

Have you ever watched a game of poker? It can be a lot fun (to watch). And right now, there is a very expensive game of poker being played out by property owners in Dubai.

My wife and I started looking to buy a flat back in October, just three and a half months ago. We haven’t bought anything, but the experience has given me a ringside seat to the game.

It’s happening on an hourly basis in many of the emirate’s finest developments.

And here’s how it works: let’s take the Palm Jumeriah, as a classic (and real life) example. At the start of October 2008, there were 28 two bedroom flats listed for sale on the Palm Shoreline. All exactly the same, so called “D Types”, all just over 1,600 square feet, all with a park view.

Our 28 poker players were all holding cards worth around 3.8 million dirhams, the asking price. Nobody would budge from their 2,375 dirhams per square foot demands. As the month passed, the first waves of the credit crunch began to hit.

Fearing the glory days may soon be over, two of the players showed their hand – and dropped their asking price to 3.6 million dirhams. No takers. But the other 26 realised they could be priced out with their asking price – so the herd effect began.

They dropped their prices to 3.4 million dirhams. By November, with 28 players still in the game, nervousness began to set in. One of the 28 players (who I know personally), panicked. He had an entire floor in Abu Dhabi to pay up for and needed the cash.

So he cashed in his chips, putting his flat on the market for just 2.8 million dirhams. The die had been cast, sending the other 27 players into panic. Everyone went below 3 million dirhams, with two players telling the agents to accept as little as 2.4 million dirhams.

The game of poker had cost everyone 37 percent of the value of their properties in just two months.

This collapse has nothing to do with fundamentals of the UAE economy (which are strong), the financial position of leading property companies (which are strong) and the long term economic outlook (which is strong). It’s just a game of poker that somebody started back in October, and nobody knows how to finish.

So where are we today? Of the 28 original players, 11 have pulled out of the game. They are serious players, and have decided to wait however many years they have to before the sale price is back above 3 million dirhams.

But that still leaves 17 players. In their increasingly desperate attempts to under cut each other, the price by last night had fallen to just 1.65 million dirhams for the same apartment.

Of course, every game of poker has to end sometime. But when? The latest offers of 1.65 million dirhams (yes they do exist, even if the listed price in newspapers is twice that), still equate to more than 1,000 dirhams per square foot – a huge whack more then the opening price.

As one of these players told me yesterday, “I can go down to 1 million dirhams if I have to, because I will still be making money. But will I? That entirely depends on what everyone else does.”

The game will only end when the banks intervene to kick start the market. With nobody offering more than 70 percent loan to value mortgages, that means you need to have 495,000 dirhams in cash to snap up the 1.65 million dirhams property.

For most people, prices need to fall closer to 1 millon dirhams before they are comfortable with the deposit.

Until then, the game goes on and on, and the price goes down and down.

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READERS' COMMENTS

What goes down part will come up
Posted by Peter, Oman on Thursday 12 February 2009 at 22:58 UAE time


Being an Engineer I defy this Newton's principle and many will agree with me.Recession cannot be compared with the headlines.Let us observe-Pour hot water from a height on the ground-The water spreads or fall on the ground but the vapor moves upwards in the atmosphere and so is this recession.It's a Darwin's principle "Survival of the fittest after 200 years". Business empires will fall and a new life will be born and life will go on until the industrial revolution will destroy it.

What goes down must go down further
Posted by Anonymous J, Dubai, UAE on Monday 2 February 2009 at 11:22 UAE time


Whilst there has certainly been a game of poker played by speculators in Dubai, it is not a case that irrational herd mentality and ungrounded fears are driving capital values down. Rather it is the realisation that Property Values have been driven up by speculators without regard to sustainable returns (i.e. rental values, demand, supply and a number of other factors) and that the asking prices were not realistic.

These prices (including current rental prices) are unrealistic and remain unrealistic. The prices would have continued to fall even without the credit crunch but it would have just come 18-24 months later - when the large weight of supply in the development pipeline was delivered and there was no one (occupier or investor) either willing or able to by; bearing in mind the above mentioned rental returns, service charges, cost and availability of capital.

However, the credit crises coupled with the increase in supply, outflow of expats, all leading to falling rental values, certain MD increasing their service charges and the (long overdue) withdrawal of immature investors will continue to drive the market down for at least six months until we finally reach a point where it makes 'SENSE' to buy.

At this point; When genuine owner occupiers and sensible investors looking at long-term returns can enter the market we will have reached a sustainable and stable(ish) point - because yes the long term fundamentals of Dubai remain strong!
With respect to your friends waiting until the market gets back up to the same levels as Summer 2008 – I hope there patient (the comparison being drawn to Dubai is the fall in Singapore values) so a nice 13 year wait. Your friends may be well advised that they never had that premium, it was paper money and having unfortunately missed the boat they should look at making investments based on real not speculative returns –
All the same factors that led to the dot com bubble to grow and eventually pop.

Serious Investors v Speculators
Posted by Peter Higgins, Dubai, UAE on Sunday 1 February 2009 at 11:36 UAE time


It really bugs me that people say only serious investors remain. The truth is that only speculators remain in the market. If there are signs of life in the market (which I doubt), then these guys will book their profits. Why would an end-user buy in this market?

Re. Mr. Khan?
Posted by SR, Dubai on Saturday 31 January 2009 at 14:05 UAE time


Dear Mr. Khan, can you please tell us whether you are one of those who "have passed the exam" or "failed the exam"???

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