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Lots of smoke, where’s the fire?
Global economic slowdown or crisis of confidence? Matt Warnock asks industry experts whether it's the real deal, overreaction or simply a lack of preparation, and what will the consequences be?
Run through a room shouting "fire" and it's guaranteed that, in spite of no supporting evidence, panic will ensue; some people will even claim to smell smoke. The collective reaction is part of human nature. It's impossible not to wonder whether the same theory is running amok through the GCC's economy right now.
Talk to developers, agents, financiers, investors, lawyers...they'll all tell you the same thing: the real estate market is presently suffering badly but, hopefully, it's an affliction that won't last too long.
Outwardly, the signs are far from positive. Emaar made 300 employees redundant last month; meanwhile, MiNC was embarrassingly forced to ask investors for extra capital to cover construction costs on its Prodigy development in Dubai's Jumeirah Village.
"The arrival of the global financial crisis has had a severe impact on the monies MiNC has available to build Prodigy 1. We are no longer able to subsidise construction of the project; it needs to be self-funded as originally intended," explained MiNC's CEO in a letter to investors.
Finance and liquidity are, of course, at the heart of the problem; and it's one that, according to the founder and CEO of Rasmala Investments, is only set to get worse for many companies. "The off-plan market - which has been known to drive up real estate prices - will soon disappear in the UAE," claims Ali Al-Shihabi.
"In general, completed or near-completed properties will witness a temporary decline in prices, but they will not face difficulties as UAE banks are expected to meet their existing obligations to projects.
On the other hand, the paper market - including off-plans - will simply die, because developers will be unable to secure financing for the foreseeable future."
The final nail in the coffin would be if the lack of liquidity, banks' reluctance to lend against yet-to-be-built properties and reduced speculative appeal were to also result in a lack of buyers for those off-plan properties that do manage to find financing.
An enviable slow down
So, the smoke is certainly billowing, but is there actually fire? The issue with recession, economic slow down, credit crunch - whatever term you choose to use - is that it can be a self-fulfilling prophecy.
Throw it around too liberally and mass panic ensues. There's evidence to suggest that developers have a skewed notion of what a slump actually entails.
"The global financial crisis notwithstanding, Dubai remains one of the most attractive destinations for investors from all over the world with over AED 158 billion invested since the beginning of 2008 to date, in comparison to total investments of AED 151 billion last year," remarked Ahmet Kayhan, CEO of REIDIN.com, last month.
Markedly, the notion of the credit crunch hampering investment from outside the Gulf region was also rebuffed.
"Our statistics indicate that the top ten investors that have channeled funds towards real estate in Dubai hail from India, Pakistan, Russia, Saudi Arabia, UK, Oman, Iran, Canada, Bahrain and Kuwait."
As far as fires go, it's hardly devastating. "What is strange is that there's all this talk of a slow down but we're still selling more than we ever have," said Hyder Consulting regional director Stephen Oehme at the recent Construction Week Conference. "It's a slow down to a point we've not yet even arrived at."
Therefore, to be clear, developers are still seeing month-on-month sales increases; the problem - such as it is - is simply that those sales increases are less remarkable than they have been previously. Given the adversity facing the rest of the world, it's relatively small fry.
Survival of the flexible
If anything, GCC developers are presently suffering the effects of mindless over-reaching; the assumption that 60% quarterly increases would continue ad infinitum and dispensing with any form of contingency plan are the reasons for the job cuts and the scaling back we're now seeing.
This crisis can be traced back to July 2007, after all, when the USFR and ECB had to pump significant capital into the US financial markets, so developers here can hardly claim to have been blindsided.
Last month, VIP Waterfront slashed off-plan prices on their Royal Bay and Royal Lagoon projects by 30% - reported as an indication of just how dire conditions in the GCC real estate market had become.
However, Slava Garin, that company's CEO, sees it differently. "It's true, we cut prices by a third but that's something we're very comfortable with. The market was coming to a standstill, so we've taken action to take advantage of the situation."
The problem, says Garin, is that prices in the GCC - and Dubai in particular - had been unrealistic for too long. "Actually, it's not specifically the prices here that are a problem, as much as the general attitude to real estate worldwide.
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