Opinion: Battling Dubai's property pirates

Many developers are so focused on their future gains that they don’t realise that the future cannot benefit them if they neglect the present, says Mishal Kanoo
By Mishal Kanoo
Sat 29 Nov 2014 04:05 AM

Over the past few months the property market in the UAE has been radically increasing in price and rapidly decreasing in value. We have seen some land skyrocket in price because the seller believes in his head that it is worth more today when he opened his eyes in the morning than when he shut his eyes to sleep the previous night.

It’s like the boy who carried the eggs to the market and started to daydream about the many eggs he has and how they would hatch into so many chickens that would produce even more eggs that he forgot to see the pebble in his way. He slipped on the pebble and all the eggs he was carrying came crashing to the ground. Instead of focusing on what he had in his hand, he wanted to see the future. That is not bad. But what he forgot is that he needed to focus on the present and allow himself a future. This is the problem with many property owners. They are so focused on their future gains that they don’t realise that the future cannot benefit them if they neglect the present.

Let me tell you a little story to illustrate this.

I was looking to buy a building for my business. I came across the ideal building that was for sale. Based on property prices, I had an amount of AED80 million ($21.7 million) in mind. He wanted AED120 million. So then the normal process of deciding whether it is worth buying it or not took place because it would take me two years to build my own and it might be only slightly cheaper.

When I was ready to meet his price, he decided that the market had moved and that the new price was now AED130 million. The time it took from contacting the owner through his broker and the agreeing a price was less than a month. In that same time, he believed his building increased in price by AED10 million. I guess they found gold under the land and nobody told me. After much internal haggling with my family, they agreed to the price.

We then asked whether it was freehold or granted land. When the news came back that it was granted, we told them that we would only pay if the land was converted to freehold. The rule in Dubai is that granted land can be converted at 30 percent of the value. All of a sudden the price shot up to over AED155 million.

At this point we decided that it was not worth it. He thought that since we wanted the building we should pay that conversion price. We thought since he wanted to sell his building and pocket a substantial profit, he would swallow the conversion price.

One year later, the same building was being offered at AED300 million. I guess I was wrong. It was not gold that they found but oil. The building is still unoccupied.

When a villa in Jumeirah, Dubai sells for AED20 million, the person buying that villa must calculate its lease cost to see if it is worth it. So in this case, over the 20-year life of the villa, the buyer would have to lease that house for AED1 million a year. Let me make it clear to the reader. That means if I lease that villa, it would cost me AED83,333 per month.

Per month! Not per year but per month!

To put this in perspective and make it a bit easier to understand, in a city like Paris, the average rent price per month would be about €2,500 ($3,076). In the area known as the Golden Triangle, which is the richest part of Paris, let’s more than double that to €6,000. That is about AED30,000 per month. Compare the two and think, if you had a choice, which would you choose.

Please don’t get me wrong. This is not a Dubai government issue. This is a Dubai landlord issue. The government promotes a free market mentality. It is also not the free market which is at fault. It is the free market’s illegitimate brother that is at fault — greed. When the owner built the house, he paid a certain amount. And unless the villa was built specifically for the owner’s own use, he used standard-quality finishing inside. This was done to lower his cost and maximise his profit when he sold. There is nothing wrong with that up to a point. But then it causes artificial inflation, which everyone suffers from when taken as a collective on the economy as a whole.

We do these things because we think we can get away with it. For a while, it works. But eventually the demand subsides and like every pyramid, there is always a top. Once someone gets to that point, there is no one else who will buy any more. Smart buyers always look for value, never at the price. In the example I gave above, if someone could rent out the villa for AED2 million, then the price of AED20 million is acceptable. But when you think about that for just a second. That is about the same price one would pay for a Rolls-Royce Phantom. Now ask yourself, would you rather buy a Rolls-Royce Phantom and gain an asset or lease a villa and gain nothing at the end of the year?

Oscar Wilde’s words resonate in my ear when he said: “Nowadays people know the price of everything and the value of nothing”. It was true over a century ago and it is true today.

Subscribe to our Newsletter

Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.