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Tue 9 Dec 2008 07:09 AM

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Property poker

The amateur real estate speculator has experienced some exhilarating highs, but is now feeling gravity tugging at his ankles.

For what some might call semi-professional property speculators and others might call amateur gamblers, the game is up.

Flipping properties – the business of buying villas and apartments off-plan and then selling them before they are built – has made millions for the professionals, but is about to cost the amateurs their shirts.

The problem, as with most gambling, is that it becomes addictive and destructive. The value of money changes as you win it. The descent into dangerous addiction for many of these flippers has gone something like this:

They took a punt on their first property around three-four years ago. The earliest property pioneers, who might have bought a luxury apartment off-plan on Palm Island for less than the price of a granny flat in their home country, watched the value of their investment double, treble, quadruple over the first two years.

These were typically high net worth individuals with diversified portfolios who were well-judged in taking a punt on embryonic real estate laws and a visionary development.

Word spread that easy money was being made and the amateurs poured into the market. Conditions were perfect: the market was rising fast; disposable incomes were high thanks to relatively cheap living costs at the time (yes, they really were low four years ago); and banks were ready to lend money to anybody with a reasonable salary certificate.

A gambler would probably have started relatively small, perhaps a modest apartment in Jumeirah Beach Residence. But when that property doubled in value before the tower’s foundations were laid they borrowed again from the bank using the paper profits from their first apartment as collateral.

The banks were even more willing to lend because the punter had a tangible asset as security. Now the player could double-up.

A year or two later, nerves began to set in about the Dubai property market. There was a lot of talk of bubbles bursting and it seemed a good time to cash in those chips. A lot of this profit taking went on at the beginning of 2008, heralding the first signs of a correction.

But the gambler was now hooked. The original investment of 500,000 dirhams had been turned into five million dirhams, and the money was burning a hole in his pocket.

The Dubai market looked like cooling a little, but Abu Dhabi was still red hot. The time for the big play had arrived. Five million dirhams used as a down payment on off-plan property in Abu Dhabi meant the same trick he pulled a few years earlier in Dubai could be repeated in the UAE capital.

If Abu Dhabi followed the same trajectory as Dubai, reasoned the gambler, five million could be turned into 20 million or more.

Then September hit. With hindsight we might now call it the Ramadan Rout. Credit markets seized, making it impossible for property developers to find finance for future projects and individuals unable to borrow money for a mortgage or even a rent cheque.

Confidence evaporated overnight. It was impossible to track the rate property prices were falling because no transactions were taking place. Worst affected was the off-plan market because nobody wanted to buy property that might be worth less when built than it was on paper.

The loss of confidence was not contained to Dubai. Abu Dhabi was hit too. The gambler was suddenly in a cold sweat. When the developer building his properties completes the construction, he will have to find a mortgage to cover the outstanding balance of the price he paid.

But the banks are no longer lending. The properties could already be worth less than he paid for them and the banks do not want to take the risk of lending against a depreciating asset.

If he can’t secure a mortgage, the gambler is sunk and the properties will be repossessed by the developer. The only remaining hope is to sell at a fire sale price before the building is completed.

This is the picture that is being repeated across half-built real estate developments throughout the GCC, and it explains why prices have fallen so far and so fast. Thousands of speculators have to dump their properties before they are completed.

There is no short term fix that will reverse the trend. There is only a hope that prices will eventually fall so far that bottom-feeding investors return to snap up bargains.

The irony is that the same professional property dealers that made a killing on the first off-plan developments will be back to make another killing at the end.

Between times, the amateur gamblers have been on an exhilarating ride, but now many are left to rue one big bet too many.

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Shilu 11 years ago

Very good description for Dubai Real Estate fairy tall.... have nice dreams ladies & gentlemen.

SR 11 years ago

Although this is a fairly good description, I don't think we should forget the bona-fide end-users (although few) who got entangled!! I guess the best deal for them is to hold-on to investments (property will give long-term returns). We also should not forget the real estate propaganda machine that insisted everything is fine up until early October and which still insists that all this is temporary!!!

chunga 11 years ago

The problem started when people were told that a house is an investment!! A house is there to live in not to gamble with or use as a large ATM machine. Let us get back to living in our houses and leaving them for the next generation to live in, not just try to get bigger & better through gambling with them.

Kris 11 years ago

Very Impressive - Its a short sad story of Dubai.

Peter Lee 11 years ago

The "good old times" are gone... The rules of the game have not changed since the "invention" of REAL ESTATE, but punters in UAE did not follow the rules in the past; now it is "game on" for those who will play by the rules...

Mohammad Khan 11 years ago

In his write-up Property Poker, Rob Corder puts all the blame on what are called by him gamblers and speculators for the property market crash down in the UAE. But a lion's share of the blame has to lie with property agents and unscrupulous developers. Unless and until, this is corrected, actual buyer's confidence cannot be regained. Here is a list of malpractices in this field: 1. Alluring and misleading advertisements, never mentioning the risk factors. 2. Forfeiting full 10% given at the time of booking, which often is to the tune of 100 thousand for cancelling a unit of off-plan property which exists only on paper, months away from seeing the light of the day because the booking was irrevocable. 3. Purchase Agreements are always made available to be signed months after booking, leaving no room to retrieve for the buyer. 4. Language of the contract is always tilting towards developer, specifying forfeits for any omission or delay at the side of buyer, giving the developer all the concessions and almost none to buyers. 5. Often, developers through the brokers create a situation not to give enough time to read the contract properly. 6. Often brokers make false promises to lure and then forget completely their promises punctuated with two or three 'swearing by God' per sentence to re-sell it in a jiffy within six months with at least 50% profit on only 2% commission. 7. In this way, these were not the so called speculators but these brokers who raised the market prices to unrealistic heights from where the fall was imminent, but under this fall the investors, particularly the new and first timers are crushed badly.

Paul 11 years ago

So... it is the 'amateur gamblers' in trouble? Funny thing is I see big builders and developers shares have plummeted in value on the stock markets. The local banks are massively exposed to real estate and need emergency government funds. Talks of various mergers in desperate attempts to survive. Big government owned companies like Nakheel and Emaar have been hit hard, having to lay off staff and suspend projects (er, I mean 'reallocate focus'). Even Dubai government debt itself is something of a hot issue, with CDS spreads soaring. It seems to me that plenty of 'big boys' also took a rather big punt on a belief that Dubai was not a bubble and would last forever. The amateur gamblers seem to be in good company with some pretty bad professional gamblers if you ask me.

ossama14 11 years ago

Yes, this is propaganda and fantasy. We are building homes not fit for any classes and we forgot the middle class, besides building homes through loans and selling homes on paper and announcing aggressive projects without taking into account the classes of the community nor the economic benefit beyond their construction.... the game is over.

S Wakeham 11 years ago

Beautifully put. The house of cards has collapsed, not only here but worldwide. Long term, property is still a good investment but a correction was long overdue - houses need to be affordable to those wish to live in them, not just to turn a quick buck (or indeed Dirham).

Sirius 11 years ago

Rob you bring it to the point - Thank YOU. The Flip-Flop community has got a lesson - but they are still back -this time called Hedge Funds. And Again and Again new Property Scandals - I think they will never learn - Investors have lost the confidence in this so called booming Dubai property market.