Dubai property bubble: This time its a different con

Government of Dubai (GoD) through various media mouthpieces keeps announcing that Dubai real estate has bounced back and is on an upward trajectory while the signals out of property markets of rest of the world economies can be described as mixed at best, with certain regions experiencing slight gains in real estate values and others still stuck at the bottom.

Dubai Government : Hype creator
No one would believe if the UAE papers report that real estate market is rebounding because they had continued carrying news items about increasing prices Dubai even as the bubble was bursting in late 2008/early 2009. So rather than forcing papers to report false property indicators, Dubai government decided to take matters in its owns hands.

On Nov 24, GoD announced building of a new city  to be known as Mohammed Bin Rashid City (MBR City) which like all landmark projects in Dubai, will comprise of bigger than this or taller than that developments. The press releases are reported by local news agencies as news  which are then picked up by international news agencies and reported as such. Most of GoD’s projects are so fantastic and are to be delivered so far in future that such news items (a press release should be a more appropriate classification) are always thin on details as no spadework has been done except for probably a pre-feasibility study by one of the myriad renowned real estate agencies who are keen to get their fingers in the pie. The press releases are accompanied by artist’s impression of the completed project but they are more suited for science fiction websites as concept art.

Emaar : Usual Suspect
Three weeks after the above announcement was made, Emaar (one of the two major real estate development arms of UAE government mainly responsible for the bubble last time, the other being Nakheel) announced a project known as Dubai Hills in MBR City which was a press release on Emaar’s website but was again reported as news by local news media:

Emaar Properties and Dubai Holding…unveiled Dubai Hills, the first project in the new ‘city within the city’ development….The new gated community will provide ultra-luxury residences, designed to the bespoke considerations of the owners. The exclusive gated community is designed around a new 18-hole championship golf course to be developed by world-renowned golf course experts, with the villas to overlook the rolling greens and fairways. Each villa will be set on spacious plots of 20,000 to 30,000 sq ft, giving customers the option to develop mansions of their choice in the heart of the city. 

Such news items (or press releases) may make enthusiastic ripples in the region but the ground reality in Dubai is very sombre. One has to realize the far-fetchedness of the above project. It is a “city within the city”. Will the inner city be built first and outer city will grow around it or infrastructure and master plan of outer city will be laid out first and then inner city be built on one portion of it. This being Dubai, details are not available.

Projects around golf courses announced with much fanfare pre-crisis are still stagnant or have yet to translate from the drawing board into anything on the ground such as  Jumeirah Gardens, Juneriah Golf Estates, City of Arabia etc. Not to mention that much heralded and completed Montgomerie Golf course designed by “world famous golf course expert” Colin Montgomerie is suffering because of recent budget cuts and mismanagement. Managed by Emaar and Troon Golf, it can easily be classified as world class facility in third class condition.

Residential projects around golf courses and greens were not the only bubble. The number of theme parks announced in a city of size of Dubai just boggles the mind. All of them are stalled. (Click on this link to take you the list of the theme parks announced by Dubai). Yet again we read this:

Ten years after the launch of Dubailand on the outskirts of the emirate, big-ticket tourist attractions are moving back to the city centre.

“Dubailand was intended to include a number of theme parks not dissimilar from the ones it announced last year to be developed in Jebel Ali, and now proposals for the world’s largest Ferris wheel, which was originally planned to be built in Dubailand, are being brushed down and moved to JBR.”

The announcement follows news last November that Meraas would develop five theme parks at Jebel Ali at a total value of Dh10bn. The project will start with the Dubai Adventure Studios park, which is scheduled to be completed next year.

Why can’t they just start with one project and once it is finished, start another one? Why do they have to have four or five or ten landmark projects under construction at the same time?

The Off-plan Con
The property bubble last time was marked by a long line outside Emaar and other developer offices in Dubai the day sales of “off-plan” properties were announced (off plan means properties that exist only on paper as “concept art”) and used to be all sold out same day. Many of those properties never got built.

A similar scene was witnessed outside Emaar sales office in late January this year (this year being 2013) on the announcement of sale of Emaar’s latest off-plan development Fountain View. The process to buy the property is that you have to register your interest at Emaar’s website. Then you are informed that you have been fortunate enough to be allotted a token. You have to stand in a queue outside the sales office on the appointed day with your token in hand wherein units will be sold on first come first serve basis. The news papers and press releases carry tentative prices and final price is announced on the day of sales. You are supposed to bring your cheque book and submit a 10-20% down payment in form of cash/cheque there and then.

People start standing in queue from 6.30 AM. They may be standing for hours as the queue moves slowly and may hear the announcement that all units have been sold and people who didn’t get in can go home empty handed. The problem is that Emaar allocates much more tokens than there are actual units. They do it purposefully to create the demand of the property as well as allowing the media to hype it up by showing pictures of people standing in line.

Moreover they are tight lipped on how many of the announced units were actually up for sale. In the absence of such information, the impression is always that there was such huge demand that all the announced units were sold. The closest any paper has ever come to highlighting this issue was for another recent hyped up and sold out project Sky View sales of which took place last week (last week being late Feb 2013). The paper Emirates 24/7 stated

He added: “We were told that all the units in the project released in Dubai had been sold out.”

Another investor, who wished not to be named, said he had also been told by the company sales staff that all units released had been sold out.

Emirates 24|7 could not be confirm how many units were released for investors in Dubai.

Money Laundering
With mortgage market still relatively tight and effectively weak UAE anti money-laundering laws, majority of current real estate transactions are based on cash/cheque for full amount. (Businessweek covered this story here). There is huge influx of money in the form of cash-in-suitcases (literally) from Iran, Russia and countries affected any civil wars/ Arab spring.

Whereas expatriates living in Dubai had burnt their hands severely in the last bubble and wary of any new real estate adventures as they have yet to see any signs of development of the last “off plan” property they bought, most current investors are people running from economic or political unrest and are falling over each other for signing up for these castles in the air.

The risk here is that many of these buyers are criminals or are running/hiding from regimes back home and are not looking to acquire these properties to live in rather use them as investments to “flip” or park their ill-gotten gains and in some cases to launder their wealth. As such, the demand for these properties is not permanent or genuine and can vanish quickly if prosecutors back home try to claw back the money.

News Media and International Real Estate Agencies : Accomplices
There is no independent media or research agency in Dubai inquiring whether there is a genuine demand for such high profile projects, does the government have the funds, who are the buyers etc. Even the world renowned real estate agencies are in on the game as frankly they get revenue when sales of projects takes place even if the project is never translated from artist’s impression of the completed project to ground breaking of the site. News media specially print media gets full page glossy ads about these projects.

If one reads the various press releases (most of the time reported as news) by internationally renowned real estate agencies operating in Dubai, the real estate prices in Dubai are always either flat or rising (they never fall).  It was widely reported in media that real estate agency Hamptons MENA says villa prices increased in Dubai by 30%. No one mentioned the fact Hamptons MENA is owned by Emaar, a fact that could have been easily verified from the agency’s website.

If one tallies the price increase in Dubai property prices as reported in media over the last few years, the prices should have risen to multiples of pre-crisis levels as price increase in Dubai has never been in single digit percentage points. Its always an increase of 20% or 30% and sometimes even 40%. Below is the news from most recent report by Knight Frank:

Luxury property in Dubai recorded the world’s second highest price increase last year, according to international property consultancy group Knight Frank.

The value of top end homes in the emirate rose 20 percent, equal to the island of Bali and behind only the Indonesian capital, Jakarta, which saw luxury property prices increase by 38.1 percent.

Central Bank : Weak regulator
Recently, UAE central bank proposed new mortgage laws that required expatriates to put down 50% equity to qualify for mortgage. The purpose was to partly deflate the bubble that the central bank believes was developing in the real estate market. However, the Emirates Banks Association (EBA), representative body of banking sector, opposed the move and as such central bank has retracted the proposal saying a new proposal would be put in place in 6 to 9 months after consultation with commercial banks. Commercial banks still hold lot of real estate assets in their books and are fearful the proposed law may result in decrease in price of properties thus forcing them to take more provisions. On the other hand, when most of transactions taking place are in cash, the introduction of law wouldn’t have caused much dent in the prices.

Few sane voices
National Bank of Kuwait is reported to have said in their recent note that property prices are 45% down from their peak of 4 years ago which means that on overall level, prices haven’t risen much from the bottom that they touched. However, such  voices are drowned by “apparently” respectable personalities. Around same time chairman of Emirates Banks Association Abdul Aziz Al Ghurair claims that “UAE property values have returned to their pre-crisis levels and in many cases have climbed higher”.

I don’t know how confident one can be of buying a property when told that the prices are at peak bubble level.

To cut through the bullshit, one need only read this as reported via Reuters:

An official at a top construction firm in Dubai, speaking on
condition of anonymity because of the commercial sensitivity of
his remarks, said concrete construction plans had not yet been
made for any of the recently announced projects.

“It will be a while before all this translates into work for
us or anything starts, if at all,” he said.

My two paisas : Caveat Emptor