Saturday, December 04, 2004

Is Gulf property in bubble trouble? (Middle East)

The red-hot Gulf property market is attracting massive amounts of investment. But not everyone is convinced that the good times will last. By Will McSheehy.

AmeInfo FN

In many parts of the world, a queue of people waiting outside a sales office in the full heat of summer would have heads turning. A jostling crowd brandishing bundles of banknotes might mean that some elusive concert tickets have gone on sale, or perhaps that a promising IPO is about to be launched. But this is Dubai, and this queue is neither unusual nor caused by an entertainment event or share offering.

The public appetite for low-risk, high-growth returns has been whetted by a marketing machine promising an investment 'no-brainer,' and the offering is a selection of two- to four-bedroom apartments that haven't even been built.

'I am waiting here because I believe these apartments will be a good investment for the future,' says a middle-aged Asian man in the line. 'I just hope that there are some left when I get inside.'

Emblematic of the fast pace of change in the economies of the Gulf states, construction work has itself become one of the constants of daily life. From tower blocks to luxury hotels, shopping complexes to multilane highways, armies of builders toil day and night to meet the deadlines set by governments and private developers. Construction investment in Saudi Arabia alone is estimated to be worth $18.5 billion annually.

While record oil prices and the consequent surplus liquidity in the public purse are driving much of the boom in infrastructure investment in the region, new power stations and water desalination plants aren't built speculatively.

Their purpose is to meet either existing or projected demand, and although the same can be said of residential and commercial developments, the crucial difference is that developments outside the public domain are subject to the vagaries of cyclical supply and demand economics. This means that with every boom comes a bust, which in turn begs the question of just how long the good times can be sustained.

The Gulf Cooperation Council states are expected to experience real GDP growth of 4.2 percent for 2004, according to Saudi Arabia's Al Rajhi Banking and Investment Corp., but this is projected to decrease to 3.3 percent for 2005. Although weaker than the global average, this pretty much puts the Gulf countries on a par with the United States (4.3 percent for 2004 and 3.5 percent for 2005).

In its latest report on US house prices, the Office of Federal Housing Enterprise Oversight (OFHEO) found that the average price of an American home rose by 9.36 percent from the second quarter of 2003 to the same period in 2004. 'This appreciation,' says Patrick Lawler, OFHEO's chief economist, 'is the largest four-quarter increase since 1979.'

Some economists are arguing that US consumer spending is being driven by higher house prices rather than higher incomes, as Americans are deluded into believing they are wealthier by the nominal increase in the value of their homes. This would suggest that the US is heading towards a residential real estate bubble, wherein the market price of a property deviates from its fundamental value as house prices outpace the wealth that the country is actually generating.

When attempting to apply the same logic to the Gulf states, however, one soon finds the marketscape to be very different. For one thing, comparative data is hard to come by as the different markets demonstrate widely differing degrees of demand pressure, availability and liberalization.

What's more, the multitude of new residential developments underway – from Bahrain's Amwaj Islands to Qatar's The Pearl and Oman's The Wave – will usher in a new era of offshore residential property that is hard to value against traditional onshore properties and that will also be open to foreign ownership.

Even in Saudi Arabia and Kuwait, where the foreign ownership of property is ring-fenced with numerous caveats, the demands of domestic economic growth are pushing prices upwards.
The emirate of Dubai is widely credited with kick-starting the boom in Gulf real estate, following Crown Prince Sheikh Mohammed bin Rashid Al Maktoum's decision in May 2002 to permit freehold foreign ownership in certain designated areas.

Developers such as Emaar, Nakheel, Damac and Union Properties have since vied with each other to launch the most eye-catching and luxurious projects, promising the latest in modern conveniences and as much green space as the budget can handle.

Dubai's new icons

So successful have their marketing efforts been that the Burj Al Arab hotel is no longer the city's only iconic landmark. Investors the world over now know Dubai by the Palm Islands emerging from the sea off the coasts of Jumeirah and Jebel Ali (and soon Deira, too).

If they haven't yet heard of the Burj Dubai – the world's tallest tower – the 185 million square meter Dubailand theme park and the enormous Mall of the Emirates replete with indoor ski slope, they soon will. In total some $30 billion worth of real estate projects are currently underway in Dubai.

At the top end of the market, luxury villas on Nakheel's Palm Islands have been snapped up by Gulf Arabs, international footballers and others who can afford the hefty price tags they carry, even before the first of them are ready for habitation next year. The developer claims that the villas on the Palm Jumeirah sold out in 72 hours, and that its Jumeirah Village properties took just one day to sell.

On the secondary market, Palm properties have been fetching premiums of 20-30 percent of their original value at auction, and the 250 manmade islands making up Nakheel's The World project are already selling for between $6-36 million each for the land alone. Foreigners are buying these properties even though the ownership of land by non-GCC nationals remains a gray area under UAE federal legislation.

But at Dubai Marina, a $10 billion Emaar development offering 'exclusive waterfront property and . . . watertight investments,' signs of speculation, the bane of the developers, can clearly be seen. The towers of the Dubai Marina offer residential capacity for 150,000 people, and all of the finished blocks have been sold.

'But if you go there at night, you'll only see about 15 percent of the lights on in the apartments,' observes Ronald Hinchey, resident partner of estate agents Cluttons. 'This suggests that the majority of the apartments have not been bought by people who intend to live in them, a worrying sign for developers who will rely on a healthy secondary and rental market to sustain interest in their projects.'

When speculators can buy offplan several months before a development is ready, and then sell close to launch for a premium of 15-20 percent, they have little need to worry about whether they'll find an end user to rent the property to when possession is taken.

The major developers are fully aware of this problem, and on October 23rd several leading property firms and financiers went on the offensive, speaking to the local press to explain how they are seeking to encourage long-term homeowners in preference to short-term profit takers.

Even though it hasn't yet opened sales of its third palm island, The Palm Deira, Nakheel warned the public that its sales agents alone are authorized to make bookings. 'People dealing with third parties are doing so at their own risk,' stated Nakheel executive chairman Sultan Ahmed bin Sulayem.

'The rules for resale have been tightened, and developers like Jumeirah Beach Residence, Emaar and Nakheel are now more inclined to discourage it,' said Sanjay Sharma, chief operating office of Tamweel, a home finance company.

'The market is gradually maturing, and the opportunities for huge windfalls within a few months of investing are becoming rarer.' Within eight months of launch, Tamweel has financed properties worth an aggregate $272 million, and promises prospective buyers pre-approved home finance up to $1.3 million.

Lock-ins for buyers

Emaar Properties issued a statement of its own, in which it said that several developers are now acting to 'ease fears that the local market is overheating with partly paid apartments being treated like shares in an IPO.' These moves include new contractual clauses to prevent the resale of financed properties within two years of initial sale, and transfer fees of up to two percent.

'From a mortgage point of view, the maximum amount available to borrowers is now down from 90 percent in the early days to 70 percent, and repayment periods are shorter,' the statement continued. 'This means that people who might have bought two properties can now only buy one.'

Emaar also devoted column inches to a comparison between the real estate markets in Dubai and Britain. This started off with rational arguments that explained how Dubai is an immature market that is still on the front end of the property curve, whereas British costs are already punitive even though high oil prices are weighing heavily on the economy.

As a parting shot, however, Emaar indulged in some uncharacteristically undiplomatic comments. 'At least in the UAE the authorities seem to have a grip on what is actually happening in their own backyard,' it said. 'The UK government has lost touch with economic reality and fueled a massive speculative housing bubble that will cause immense damage when it bursts.'

While house prices have been a dinner-table topic in Britain for decades, it would seem odd that a Dubai developer should spend time discussing the merits of its market in comparison to one that would seem wholly uncorrelated.

In this post-9/11 world, however, appearances can be deceptive. Gulf Arabs have long favored British property both for holiday use and as a component in a diversified portfolio of assets, and in recent years British and other European markets have soaked up much of the capital that Arabs have repatriated from the United States.

For the developers of freehold projects in the Gulf, not only are Britons and other Europeans suitable marketing targets in that tax-free living and year-round sunshine will appeal to them, but also because of the prospect for capital gains in the Gulf that would be hard to realize at home. Add to that the prospect of steering Arab capital into exciting local projects rather than overseas property, and the developers' strategies suddenly become clearer.

The developers are not just focusing on the outlandish, however, and a number of projects have been designed to meet the needs of the ordinary Dubai resident and worker. The Dubai government wants the local population to double by 2010, and this growth obviously can't all come from jetsetting rappers and film stars.

At The Greens development next to the Emirates Golf Club, 741 square foot one-bedroom apartments officially start at $100,000, with home finance packages pre-arranged with providers such as Mashreqbank, Dubai Islamic Bank, Dubai Bank and Amlak Finance, the latter two being part of the Emaar Group. At this lower end of the market, population density is far more readily apparent, with families enjoying the swimming pools and recreation facilities in force at the weekends.

Stabilising yields

This is what the developers want to see, and many are encouraged by the increasing availability of residential mortgages. If property is being financed by mortgages, rather than by speculator cash, then the logic is that rental yields will stabilize.

The more they delay the sale of properties until they're actually ready for buyers to move in, the smaller the window for speculators to exploit. That's not to say that prices aren't still being forced upwards. Two years ago a two-bedroom townhouse at The Springs near The Greens would have cost $135,000. Now the price is more like $190,000.

As you would expect, most real estate agents in the UAE are inclined to talk the market up, at least in public. But some industry specialists are concerned by the gulf between offplan paper trading and the delivery of real homes.

Christopher Steele is the head of Middle East for Hamptons International and is based in Muscat. His firm deals mainly in property in Bahrain and Oman, and he is wary of the Dubai market because he anticipates 'a major price correction in the next 12-18 months.'

Pointing out that developers expect to complete the construction of 8,000 new homes in Dubai within the next nine months, he expects that developers will soon need to reassess the fundamental worth of properties in the mid- to low-price segments of the market.

'The volume of new developments that have been launched in the past few months has largely saturated the market of offplan buyers,' he explains. 'When these new units reach completion, the developers will need users to fill them. This is a real market scenario, and we feel that the supply and demand balance is out of proportion now.'

Arif Naqvi, chief executive of Dubai-based private equity firm Abraaj Capital, takes a different view of the numbers. Calculating that the GCC states have a population of about 30 million, and around 60 percent of those are resident expatriates, he says that 'even if only five percent of those expatriates are able to buy property, that will translate into a huge pent-up demand across the region.'

'When you look specifically at Dubai and consider that Emaar has only released 5,000 units so far, I think you can feel confident that that demand for real estate will be strong for some time to come,' Naqvi continues.

'The danger in the market is irresponsibility due to a lack of regulation. Regulators must develop frameworks that are more benign than the ones found in the Gulf now, but that also control the rapid pace of change.'

While Dubai encourages a construction boom to meet the needs of an expanding population, other states are taking a more cautious approach. Bahrain was first to the post when it issued a decree permitting foreigners to own land back in 2001, but estate agents report that the bulk of demand has come from expatriates already living in the kingdom and from Saudis across the King Fahd Causeway.

On the back of its enormous reserves of natural gas, Qatar is also preparing for a bright future, and 150 towers will rise above Doha's West Bay area by the end of 2007. Properties are quickly snapped up in Qatar as they are in Dubai – 456 apartments in 24 hours in the case of The Pearl this October – but freehold ownership by foreigners is still restricted to a select few projects including The Pearl, West Bay Lagoon and Al Khor Resorts.

When it comes to future predictions for Dubai, few are willing to hazard a guess as to when the good times will stop rolling. As one Dubai banker wryly comments: 'I've been watching the growth of the real estate market for the past five years or so and have always felt it to be a bubble. The problem is that I've now realized that I've missed the boat. You could say we're in a bubble now; but, if so, it seems to be made of pretty resilient rubber.'


At 8:28 PM, Anonymous Anonymous said...

Please do not compare london giant real estate market with a baby market like dubai.

Thank you.


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