By Mishal Kanoo
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
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.For all the latest real estate news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Let the income (or potential of income) a property can generate be your guide to what you pay.
Study the income/rent of the property, make assumptions on the incomes future stability (up or down), understand net versus gross.
Want me to buy an off-plan apartment on the palm for 6 million aed? Then you better prove to me it will rent for a minimum of 330,000 aed per year.
Like night vision goggles that can cut through any estate agent lies.
Good article - thank you
I totally agree on the above. It is always the greed which is messing up peoples mind. Previously the properties market was a long time investment. Nowadays everyone in Dubai wants to make quick money. This is wrong and till date the steps done by RERA are not at all helping to stabilise the market and the property prices. In 2010 I paid for my flat in Tecom 55k, in 2011 it went down to 45k and if I would rent it now it is 72k! How? Its the same building, the same location, the same average finishing! This can't be justified at all, but as long as it is not properly controlled and as long as Landlords are free to do whatever they want, there will be no change on this.
Excellent article....a real perspective on the real estate market...driven solely by greed and and no fundamentals....
Humans despite any number of recessions depressions slow downs will never get rid of the inherent greed that lives within.
Eventually, the supply demand principle will fix things. Dubai's RE market did heat up again and stupidity driven by greed was back with a vengeance for a short while.
That villa in Jumeirah better be a huge one.
Thank you. Sane comments and a ton of truth on the housing front - and in AB of all places! who would ever have expected that?
I'm not sure I agree "this is a Dubai landlord issue". Greed is a human trait manifested all over the world. The example cited in the article is indeed a display of greed in its worst form but the insinuation that the increase in property prices is due mainly to greed is not exactly fair. The factors that have led to the rise in prices in Dubai had more to do with economics and geopolitics rather than idiosyncrasies.
Usually in Real Estate, landlords take into consideration market factors without considering the value.
When Dubai won the bid of Expo 2020 some landlords were asking for 80% increase in some selected residential properties (specially the ones in downtown) whereas average retail and commercial properties had a hike of approximately 55% in Q4 2013.
Later in 2014, when investors started researching the market in Dubai for potential opportunities such as expansion or relocation, preparing for Expo 2020 and when landlords realized that many deals will take place closer to 2016 / 2017, they have realized the value of increasing the prices blindly.
I guess some landlords woke up from the celebrations late.
Excellent Article! Ed Attwood should read this article, as he has a unrealistic view of long term benefits by removing the Rent Cap in Dubai.
@WHJ - Mishal comments that the building he looked to acquire still lies empty so this should signify enough that greed is driving pricing not market fundamentals.
I've seen this many times since first landing here more than 15 years ago; villas and apartments lie empty because the price fixed by the landlord was unrealistic and yet they refuse to drop the price, holding out for months or years for the price they want.
These landlords don't care if their property is rented or not; as long as it becomes occupied at the price they have set. Now one could argue this is to indemnify themselves against having to rent at a lower price and then not be able to raise that price when the market improves. Even so, it is a factor that artificially keeps rents higher than they should be.