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Tue 27 Jan 2009 12:10 PM

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What goes down must go down further

Right now there is a very expensive game of poker being played out by property owners in Dubai.

Have you ever watched a game of poker? It can be a lot fun (to watch). And right now, there is a very expensive game of poker being played out by property owners in Dubai.

My wife and I started looking to buy a flat back in October, just three and a half months ago. We haven’t bought anything, but the experience has given me a ringside seat to the game.

It’s happening on an hourly basis in many of the emirate’s finest developments.

And here’s how it works: let’s take the Palm Jumeriah, as a classic (and real life) example. At the start of October 2008, there were 28 two bedroom flats listed for sale on the Palm Shoreline. All exactly the same, so called “D Types”, all just over 1,600 square feet, all with a park view.

Our 28 poker players were all holding cards worth around 3.8 million dirhams, the asking price. Nobody would budge from their 2,375 dirhams per square foot demands. As the month passed, the first waves of the credit crunch began to hit.

Fearing the glory days may soon be over, two of the players showed their hand – and dropped their asking price to 3.6 million dirhams. No takers. But the other 26 realised they could be priced out with their asking price – so the herd effect began.

They dropped their prices to 3.4 million dirhams. By November, with 28 players still in the game, nervousness began to set in. One of the 28 players (who I know personally), panicked. He had an entire floor in Abu Dhabi to pay up for and needed the cash.

So he cashed in his chips, putting his flat on the market for just 2.8 million dirhams. The die had been cast, sending the other 27 players into panic. Everyone went below 3 million dirhams, with two players telling the agents to accept as little as 2.4 million dirhams.

The game of poker had cost everyone 37 percent of the value of their properties in just two months.

This collapse has nothing to do with fundamentals of the UAE economy (which are strong), the financial position of leading property companies (which are strong) and the long term economic outlook (which is strong). It’s just a game of poker that somebody started back in October, and nobody knows how to finish.

So where are we today? Of the 28 original players, 11 have pulled out of the game. They are serious players, and have decided to wait however many years they have to before the sale price is back above 3 million dirhams.

But that still leaves 17 players. In their increasingly desperate attempts to under cut each other, the price by last night had fallen to just 1.65 million dirhams for the same apartment.

Of course, every game of poker has to end sometime. But when? The latest offers of 1.65 million dirhams (yes they do exist, even if the listed price in newspapers is twice that), still equate to more than 1,000 dirhams per square foot – a huge whack more then the opening price.

As one of these players told me yesterday, “I can go down to 1 million dirhams if I have to, because I will still be making money. But will I? That entirely depends on what everyone else does.”

The game will only end when the banks intervene to kick start the market. With nobody offering more than 70 percent loan to value mortgages, that means you need to have 495,000 dirhams in cash to snap up the 1.65 million dirhams property.

For most people, prices need to fall closer to 1 millon dirhams before they are comfortable with the deposit.

Until then, the game goes on and on, and the price goes down and down.

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Martin 11 years ago

Thank you for the figures Mr. Bhoyrul. This article shows how overpriced objects are. It shows that these objects are all for speculation. Were should be the increase in value be from? Speculation! The value of the area the object is in did not rise. So the whole market is not really for serious buyers who want to move here especially since you can never own property fully as an expat.

Martin 11 years ago

If you have lots of money you can speculate, if you have little money you must not speculate, if you have no money you have to speculate.

Doug 11 years ago

The problem is that banks have stopped loaning. It doesn't matter whether someone who owns a flat on the Palm is dropping their price - if the bank won't give you a loan/mortgage, unless the price is less than your monthly salary or your credit limit, you can't buy. It's the fault of banks. But on the plus side, at least now all those smug so-and-sos who thought they were masters of the universe have suddenly realised they can't pick a price out of the air and expect people to pay it.

DG 11 years ago

Dubai is still the most awesome city in the Middle East to own a Villa and enjoy an unparalleled desert lifestyle thats connected to the world.

scc 11 years ago

it's an amusing analogy & contains threads of a real life scenario, which is refreshing after all the smoke and mirrors. However, your argument loses its own thread half way through. It has everything to do with the fundamanetals of the UAE economy. What better indication of the leveraged, over hyped property free for all than this? Second, you must be unhinged or in their pay if you think the fundamentals of property companies here is strong. Third, it is unclear where the global rout and the economic mismanagement evidenced here foretells for the future of this city. Many still believe a sudden and unlikely return to bank liquidity would kick start the property market. This only highlights a failure to understand the nature of why this is happening coupled with the all too human desire to blame the financial institutions again Grateful for the insight though Anil

Jebel Ali Baba 11 years ago

What the heck is desert lifestyle? Do you mean living in a sandbox with cranes, bulldozers and trucks 24/7? Or do you mean a beduines life? The second option doesn't ask for much money... Dubai compares itself with metropolitan cities around the world but has still a long way to go to be Miami, Marbella, Singapur, Hong Kong, Brisbane or similiar.

Paul King 11 years ago

Another clueless article about the local sandcastles for sale on "wannabe island". For "serious players" read "complete dummies!" This meltdown has now got very little to do with banks funding property, but more to do with asset values returning to realistic levels. Watch the 2-bedders on the fake beach go back to launch price!

ale 11 years ago

Nobody seemes to want to understand that the party is over.The kamikaze loans that banks have made to people unable to repay(90%) is over.With that kind of money(3.8million dhs) i bought(cash)an apartment in paris where i can see the tout eiffel from my window...who in his right mind buys something in dubai,in the middle of the desert,in the middle of nowhere.... Good luck to all the "poker players"...

Doug 11 years ago

Most awesome place in the ME to own a villa? It's hardly like there's much competition. Jeddah? Beirut? Baghdad? Manama? What's more of a fair comparison is if Dubai is still an awesome city to own a villa full stop. I'll take Palm Springs over Dubai any time.

paul 11 years ago

The fundamentals were sound? Are you kidding? What was the Dubai economy once you stripped out the property bubble? Honestly I really cannot believe that some of you have still not got it. You spend the last 3 years telling us Dubai won't crash because it is simply super and smashing and the economy is really strong. And then Dubai (surprise surprise) goes exactly the same way as the US and UK, and finds its property bubble pops and banks are hit and have no money to lend. But you guys still cling to some absurd belief that somehow poor little innocent and 'fundamentally sound' Dubai has been knocked out by some nasty unforeseen fall out from the US and UK economic problems. Dubai's economy was not fundamentally sound, it was a huge credit bubble, just like the US and UK but far bigger. Dubai may be the best place in the ME to own a villa. Unless you bought it for investment as 95% of owners did. And then it's probably the worst place in the world.