Finding the floor

Negative speculation

Posted by Aftershock at 00:50 UAE time

Sorry guys, but this article along with many of the comments posted here are nothing but speculation. All of us were criticizing flippers and speculators for driving the prices up and all what I see here is pure speculation on how low the prices will go. Agreed, the market needed a correction or a wake up call, but surely not a crash!! Real would't have droppped that much if the whole world around us was not collapsing and banks were still lending. Such articles are doing nothing but push the market down even further.
Everyone should realize that this property crash has an adverse impact on all of us, regardless of whether you have invested in property or not. When prices go down that much and too fast all other business sectors will be affected. 30 to 40% of Dubai's workforce is directly involved in the real estate and construction sector - the vast majority of these guys will soon be jobless! Needless to mention, there are numerous sectors that are directly or indirectly dependent on this important sector - banks, real estate agents, material suppliers, advertising/media agencies, publications who rely on ad space sales and even car dealers, shopping malls, retailers (yes even the small grocery store located next to any labour camp!!) This sector was fueling demand in other areas of the economy. Yes, it was also driving inflation, but with prices dropping by 70 and 80% like what many of you guys are hoping for, then we are undoubtedly looking at deflation now. Why do you think we were securing good job opportunities in Dubai and our salaries were considerably increasing every year!! I personally changed my job 3 times in the last 5 years and was easily getting a 40-50% hike in my compensation every time, even though i have nothing to do with real estate. The economy was booming and real estate was one of the key drivers (along with oil prices, tourism, retail, exports etc). Needless to mention, when banks take a big hit on their real estate portfolios they will definitely curb lending even further to cover their looses, multiple the credit shortage you see now by 2 or 3 times, what banks are doing now now is only preparation for what is coming in 09. This simply means no credit and no growth. It's a vicious cycle that will impact everyone sooner or later regardless of your business sector. So even if you've luckily managed to keep your job, then forget about next year's salary increment and bonus – perhaps the following year as well. Companies benchmark salaries and both real estate and banking are 2 of the highest paying sectors, so expect the benchmark to come down very soon wether you are in marketing, sales, finance, engineering etc...
The stock market will never bounce back except when real estate recovers. Wondering why? Because the majority of listed companies are real estate, construction or financial services . If the stock market doesn’t recover then company valuations will continue the downward trend, ratings will follow and credit will become impossible. Simply put, the whole economy will hardly recover.

This is what economists call deflation and it's what scaring everyone in the US...hence, the hefty stimulus packages!! The key difference is that it's happening too fast in dubai.

If Dubai's key asset class which is supposedly securing the $80 billion debt (land, real estate) is severely declining along with oil prices, retail and tourism. Then you (as part of this economy) will not be worth what you are worth today, at least if you are planning to stay in this country. With the recession hitting many other countries more severely, I strongly doubt you will find a job elsewhere. So unless you are a filthy rich guy with lots of cash and waiting on the sidelines to pick up distressed assets, then start preparing yourself for a bumpy ride and by the way you still won’t be able to afford property even at distressed levels.

The faster they rise the harder they fall

Posted by Trojan at 21:48 UAE time

Rob,
I think the first question you should ask is: who would want to buy with the mass layoffs and the real-estate dependent economy of Dubai contracting severely? That question aside, though I generally agree that prices have to fall by a large amount, I don't quite agree with your math. If a speculator gets his/her down payment back, be it 30% or whatever else, he/she still owes the remainder, the 70% or more. That is not going away, the developer still wants that amount and someone has to pay it.

As for how far price will drop, I think the closest we can get is a ball park figure - my crystal ball is as good as yours. History may offer some clues: the 85% drop in Singapore real estate in the late 90's in a matter of just 18 months. Here is one thing a lot of people might fail to notice: during this whole economic mess in the US house prices dropped an average of 20% from their peaks. In comparison, average prices in Dubai dropped by that much and in some areas by as much as 40% in a just a few months. That just goes to show how severe and fast the crash could be. I and a few (crazy) others have been warning of this exact scenario for the past year on this site's blogs, and I don't mean just the correction, but the speed and severity of it. As I said before, that is how bubbles burst, speculators go away faster than anyone could have imagined.

Therefore a 70% drop is completely plausible, so is 80%, or 90%; who knows! You could try other methods to estimate the drop, such as a discounted cash flow valuation of future rents (though realistic rents, not the outrageous rates owners still ask for but can't find takers). You could also calculate it based on an affordability index. Whichever method you use, you have to keep in mind that this real estate casino was fueled mainly by easy credit (not high oil prices as many still believe, though it did have a role) and easy credit is gone, for a very long time at the very least. So the fuel that has been feeding this frenzy is gone and huge drops have to happen before anyone will buy. But maybe no one will really want to buy, at least not enough to meet this huge surplus of supply.

Ready property

Posted by Man at 17:04 UAE time

I dont see anything that will improve the market. Once the confidence is lost it is very difficult to get it back. My property will be going to ready in Jan 09. I have put it in the market for last one month but no buyers. I have cut down the asking price now to the Orignal price. Lets see if i get a buyer

How low can it go?

Posted by viva_la_crash at 08:44 UAE time

Rob,
Interesting argument that counters some of the very deluded perspectives touted about town. (Dubai Pearl being major sponsor of the recent film festival surely must have won the 'best comedy' gong). The crashing 'property' market is an event many of us normal people here in Dubai have been eagerly anticipating for some time.

But I've got to ask though - apart from opinions expressed by pundits and observers, "when will this actually start to affect the asking prices?" I've been tracking several specific buildings in the Marina for 10 months and while the ludicrous price increases seem to have halted - the advertised asking prices are still holding at the summer peaks (ignoring the ridiculous spike that occurred just at the end).

I recently contacted a seller with at least several properties in this building and when I sensibly responded to his 'summer peak' asking price, he countered "not in my building." Obviously this one conversation doesn't indicate an entire market - or does it?

The other chap (Vikram) who posted that he's trying to sell several apartments and has not had a single credible offer - did you employ a basic principle in supply & demand i.e. lower the price?

The longer the inevitable is denied - the harder it will go down and yes, "in your building also." The so called 'premium' properties will not be immune as the oversupply that clearly already exists (held by speculators - lights off, door locked) will drag the whole market down - even the ones with a German bog and a 'free' TV.

I feel for the suckers who invested their pensions etc here and will be eating dog biscuits the rest of their lives - but there won't be many tears shed for the greedy and the arrogant who have effectively caused their own undoing.

I'll be sitting back with a box of popcorn and enjoying the show and I won't be reaching for my cheque book until the credits are rolling.

Vague

Posted by Obelix at 14:23 UAE time

The calculations are a bit vague and that is the beauty of half baked information. I've wanted to buy here but am beginning to be convinced that it's not worth it. Just recently the maintenance charge in JBR has gone up by almost 200% and for a one bedroom apartment it's the much more than the school fees of my kids put together ! I've worked out that as long as my rent is less than the interest I would pay on the property it is worthwhile to rent and you don't have to worry about any maintenance issues.

What drove prices up here was unabashed greed and funds of speculators from outside UAE. No wonder since more than 70% of the investors do not reside in Dubai.

Dubai property market

Posted by Anonymous at 11:49 UAE time

If the credit markets open again...
and if the price of oil rises above $50...
and if the developers don't default...
and if their sub-developers don't default...
and if their contractors actually deliver the units...
and if the delivery is clean...
and if Dubai expats still have large packages...
and if Dubai expats feel confident in their jobs...
and if RERA doesn't increase the cost or difficulty of property transfer...
and if Dubai property still seems competitive, relative to the incredible deals available in the UK & USA...

Then PERHAPS we'll see as much as 30% of peek prices for ready-units in Dubai. And even these lucky sellers are still in for a long wait, as nothing is selling at the moment.

For the sake of Dubai, I hope things improve!
I love this city, and I would love to see the Dubai vision come to life. I believe Dubai can get through this, but not without some pain.

Once people believe we've seen the bottom, we'll have a good shot at a recovery.

Posted by Baker at 23:17 UAE time

The assessment of 30% from the original price is very feasible, given the decline in property markets worldwide. However, the situation is much worse for those whom bought and fully paid for apartments and the developer failed to deliver even after 1 year of the delivery date in the sales contract. The owners are losing money because they are paying rent for one extra year and then could not sell the property at the peak due to negligence by developers to deliver on time. The question is should those people take the developer to court and file a law suit case against them!!!

Developers are part of the problem, as they have collected the advance payment from unworthy speculators (bad guys) and now the good guys whom bought property to live in have to pay the price!!!!

Still waiting

Posted by Vikram at 23:08 UAE time

Just to add, I had put my properties(ready & leased) on the market sometime back and listed with 3-4 agents. To date, I have not received a single tangible offer. Meanwhile I am still in the black because I continue to receive rent at roughly 10% of my investment.

I can't afford to think short term, simply because my properties won't sell.

Catch 22 situation

Posted by Peter Lee at 11:26 UAE time

I guess this is the classic Catch 22 situation… Rob’s suggestion of 30 percent as base floor or bottom out price is totally fair from the consumer’s point of view, but I seriously doubt that it will make economical sense to sub developers, especially when land plots were acquired at a premium from master developers. Look at the Waterfront “LUXURY” projects that were launched during the October to November period. I don’t think any of these “LUXURY” projects’ developers would ever consider building the projects at 30 percent of the launched prices. Should the price drop to 30 percent, I think many of these projects would be shelved or even worst, the master developer would have to deal with high number of defaults or “run-away” sub developers. Imagine this, ‘Twice the size of Hong Kong’ becoming ‘Twice the size of Hong Kong in terms of uncompleted or abandoned developments’. This is pretty scary…

To improve the current free falling of the property price, maybe the government could help by regulating the new supplies to the market, such as any new project can start off-plan sales only when the developer has completed the ground floor, or even better, the roof. This will ensure that there is at least eight to nine months, if up till ground floor; and 18 to 24 months, if up till the roof, conditioning period for those launched projects to make necessary market re-adjustments and will also give the much needed assurance and confidence to the purchasers or investors in off-plan properties. This will also further filter out those ‘fly-by-night’ developers and developer “wannabes”.

Finally, I feel that the market requires more transparency with transaction data and indexes that allow purchasers to exercise their “caveat emptor”, whether is it for the purpose of investment or own occupation. This would help resolve the “blame game” we are experiencing at the moment…

30 % or 70% of base price?

Posted by Arsalan Tabani at 11:15 UAE time

The method of assessing 30 percent as the floor based on default seems incorrect, as on forfeiture, the amount that the speculator will loose is up to 30 percent if he is not able to pay installments. Which leaves 70 percent as the floor price the speculative investor would expect.

In other words, if it is to be sold at 30 percent of the bought price, it would practically mean that the selling investor undertakes to forgo 30 percent deposits plus pay another 40 percent to the developer or the new buyer while leaving only 30 percent to be paid by the new buyer, which is of course not practical. An investor who has graduated from even pre-school would rather wait till he has paid 70 percent in installments before committing to make a loss today.

Your projections need more clarfication!

Posted by troy at 00:54 UAE time

There is no doubt that property prices are declining at an alarming rate, but I can’t really get your 30 percent theory. Are you suggesting that prices will go down significantly to be only 30 percent of the prices we witnessed this summer? Do you mean 30 percent of the premium or the total value of the property?

Does this imply that one will be able to buy an Emaar property (let’s say 1 Br in the marina) which was trading at 1.7 to 2 million this summer for only 600k? Don’t you think that this is a bit too much considering that they were sold by the developer in 2006 or 2007 for 900K to 1.1 million and they are ready to move in? Even if we look at properties that were sold when the Dubai boom started, lets take the springs, the 2 br townhouse was selling at 2.6 to 2.8 million at the peak, do you really think that it will go all the way down to 860k (2004 or 2005 prices!!!). I guess you didn’t take into account that that these properties have been sold at least 3 or 4 times (if not much more) and the present owner will have paid a premium over and above the original price which will be his bottom price. Otherwise, s/he can opt for rent which can generate very reasonable returns. However, there are some owners who kept there properties from 05 and 06 and they are the ones who are offering bargain deals nowadays and still making healthy premiums. I think you need to shed the light on what you mean by wiping off 70 percent of the value, whether you mean off plan or ready property, premium or total value. Even if it’s off plan, then the speculator would have bought it in 07 from the developer at a relatively high price per sq foot and his bottom will be in the range of 10 percent or 15 percent below the original price i.e. a negative premium of 10 or 15 percent.

I also don’t think that those speculators have only paid 30 percent of the property with the remaining 70 percent due on handover. I’ve never seen such payment plans (30-70 or 20-80) except in Abu Dhabi. By and large, payment plans in Dubai are 15 to 20 percent every 3 or 6 months. So by the time handover is due the owner should have paid 70 or 80 percent of the original value plus any premium in case he/she got it from the secondary market.

I can't wait

Posted by Aadil at 18:37 UAE time

I hope your conclusion comes through but something tells me that with prices that far down, there'll be plenty more speculators to start again buying and flipping, especially if developers delay thousands of units.

When the market finally bottoms out the transfer duty for uncompleted properties should be increased to 4 percent or 5 percent to discourage future speculators. However I don't see that happening.

Finding the floor

Posted by David at 16:46 UAE time

Rob,

I think you have come pretty close in this article to expressing what most of the pundits are thinking. It is possible though that your worst fears will be realised in terms of the percentage decline, which many believe will be closer to the 80 percent level, almost in a "re-run" of Singapore in the early 90's.

Prices at 80 percent below the peaks of 2007 will bring a sense of reality (and reasonable affordability) back to the market, but true sustainability will only kick in if sufficient governance processes are put in place to curb the other problems in the sector, such as the "creative revenue generators" that some of the developers have come up with these past few years (like exhorbitant maintenance charges etc).

The other question on everyone's lips is regarding how quickly this will all pan out... 6-12 months?