Atlantis - Not quite as empty as the original

Dubai’s property prices are falling like the proverbial rock and the government of Abu Dhabi has stepped in, in an effort to prevent a complete meltdown in Dubai’s property market. Dubai’s two largest mortgage lenders, Tamweel and Amlak Finance have reached the point where they are unteneble and Abu Dhabi’s state owned “Real Estate Bank,” will take over both lenders.

Dubai has already borrowed an undisclosed amount of money from oil-rich neighbor Abu Dhabi, and this is the next logical step. Both Amlak and Tamweel’s stock value has fallen over 80% this year, and neither company is in a position to raise financing from outside the UAE. Amlak has suspended offering new home mortgages, and several foreign banks, including HSBC and Lloyds TSB have tightened lending criteria.

Credit-default swap contracts covering the debt of Dubai Holding LLC, the emirate’s holding company, were last quoted at 1,100 basis points on Nov. 21, according to CMA Datavision prices. That compares with 245 basis points in March. This shows a massive decline in the perception of credit quality and cheap international lending has all but disappeared. almost overnight. Amlak has already taken on another $381 million in Islamic loans this year, and Tamweel reaised $600 million from the sale of Islamic bonds. Amlak and Tamweel shares were suspended from trading today, which should mean good news for shareholders.

Similar issues abound - Kuwait’s government is taking steps to re-capitalize Gulf Bank KSC after they reported a $1.4 billion loss in trading derivatives; real estate prices in Doha have fallen by 50 percent over the last month alone; and according to Gulf News, room prices at the recently opened Atlantis hotel on Palm Jumeirah have been slashed to $44 a night. To put that in perspective, prices were originally quoted as $454 per night. Ouch! Despite these massive cuts, occupancy was just 26% on Sunday, 30% on Monday and 33% on Tuesday.

The real question is still just how far will Dubai property values fall?

Dubai's property bubble bursts

After months of press releases and government promises that there will be no such thing as a bubble in Dubai, the big boys of Dubai are finally saying, “Beam me up Scotty, I think I’m in trouble.”

“Trouble,” would be the understatement of the year, and the developers are making it clear they are not one whit interested in the fortunes of the smaller investor. Despite the recent introduction of laws written to protect smaller investors, Dubai’s property developers are thinking up new ways of avoiding any responsibility and screwing every last penny possible from the situation as fast as the new laws are passed.

MiNC, developer of Prodigy 1 in Jumeirah Village South has put a new proposal to their current investors:

Pay more than the agreed price, or we will cancel the project and keep your deposit.

The wording was slightly different, but that is what it amounts to. According to MiNC, two banks have withdrawn funding and “the project is no longer financially viable. Costs have increased to the extent that MiNC would make a significant and material loss if it were to build this project.”

Gulf News

It is actions such as this that will finally deflate what is left of the Dubai bubble. A lot of confusion is surrounding Article 11 under Law 13, which guarantees investors - “In the case of canceling the contract, the developer may retain 30 per cent of the ‘contract’s value’, and the rule of (30-70 per cent of the money paid) shall be applied on amounts exceeding 30 per cent.”

Key words here are “contracts value,” not “monies paid,” as the Article originally stated. Arguments abound and opinions are divided amongst those who feel that Dubai no longer needs outside investors and the emphasis of government intervention should be in favor of protecting the developers, and others feeling (as we do) that the smaller investor is vital if Dubai wishes to be anything more than a “Disneyland in the desert.”

As things stand at the moment, if a small investor defaults (as is starting to happen on a large scale), the developer keeps 100% of the money in some cases, and developers are simply refusing to answer questions or deal with inquiries. A number of smaller investors are attempting to band together in an effort to at least recover the “70% of monies paid.” One such group can be contacted here:

investorslaw13@hotmail.com

Elsewhere, prices are falling dramatically, with distressed properties being offered at 40% discounts on Palm Jumeirah, which is still massively over-priced. If falls in the US and Spain are any indicator, some analysts are expecting Dubai’s prices to fall anything as much as 60% in the next few months.

Other property websites are now starting to report on Dubai’s bursting bubble, and here is a selection:

Reuters - Dubai real estate suffers as distressed sales rise
AOL Dubai Property boom halts as prices fall and jobs go

According to Mohannad Sweid, CEO of Depa, some of Dubai companies are in “denial” about the viability of projects in light of the global financial crisis.

We are at the denial stage where lots of developers know for a fact that their projects should be cancelled and they’re either not announcing it or they’re saying it’s going to be delayed. We cannot deny the effect [the crisis] has been having, we are a part of this world and I believe it’s just not right to say we haven’t seen any impact. What we have had in the GCC in the last three years is the difference between reality and non-reality. Our market research showed there will be 280 new hotels built over four years within the GCC. That was advertised all the time… If we look at the reality - how many hotels have been delivered - it’s hardly more than five or six hotels a year.

In terms of risk to his own firm, Sweid was confident that infrastructure projects would still go ahead.

In this region, a lot of infrastructure is not developed yet and these elements of infrastructure have to be developed - it’s not a choice,” he said, citing Dubai’s new metro system as an example. He added that Depa was still on track for growth for next year, but the “fears” were for 2010 and 2011.

The real question is not whether the Dubai bubble has finally burst, but more how far it will deflate. With property prices quoted as having risen somewhere in the region of 76% over the last year, a major correction is likely. Already prices have fallen 40% in most developments, and we feel it is going to deflate a lot faster than it blew up.

Discussion forums can be an excellent way of determining the true state of a market. Unfortunately, many so-called “discussion forums,” are populated almost entirely by real estate agents - and do not give a true picture. One of the research tools we use to sift through the sales pitches when discussing prices are forums. This is a brief list of forums that are populated by genuine people talking about the “for real,” situations they find themselves in. If there is a market I have missed that You are interested in, please drop me a line and I will see if I have one on my collection - Contact IPI.

Most of these do not have property for sale, and, on the whole, any forum that is based solely on property for sale is to be avoided.

India
Indian real estate forum
New Zealand, Australia, UK, USA
Property talk
Spain
Spanish Real Estate Forum
South of France
Anglo info Riviera
This company has a number of other sites with discussion forums - mostly around Europe, but also Singapore, Thailand and China.
Dubai
Dubai discussion forums
Skyscrapers
Skyscraper city
Luxury Property
The Luxury Property Forums

Unfortunately, much of the current discussions on most of these centers around property prices falling. If you are a cash buyer in any of these markets, these are good places to find a property investment bargain. If you are an indebted seller, expect no good news. Most of these forums also discuss non property related issues for English speaking expats.

Dubai’s lack of transparency is causing potential investors to pull out of the market in droves. Foreign investors withdrew as much as $57 billion from UAE banks in October. The plan of producing press release after press release claiming unreasonable strength in the Dubai property market is backfiring dramatically. When faced with conflicting reports about the state of the market and no true figures, many are chosing to ignore Dubai as an investment completely.

Here are a few recent reports, mostly coming from “news” sources in the UAE with lurid headlines and almost no information backing the claims up and dramatically opposite information being produced at the same time.

Headlines:

Dubai real estate prices may not come down

Dubai’s real estate will not see a decline in prices from what they were prior to the global market meltdown, according to a new report.

“This is a great demonstration of how strong the real estate market in Dubai is,” said Tariq Ramadan, Chairman of Tharaa Holding and author “Dubai Real Estate Market Report, The Rescue Plan, Q4 2008 - Interim Report”.

He said cash-rich local and international individual investors continued to show faith in the property market and hence the prices have not declined.

Emirates 24/7

A few days before:

Slowdown in Dubai real estate sector will be shortlived, experts say

Dubai: The real estate industry in Dubai is currently at a standstill, as fewer people are buying new properties due to much speculation in the market and the liquidity squeeze that gripped the local banking sector recently, experts said on Tuesday.

Gulf News

At the same time, Damac properties is shedding staff, blaming the “continuing global slowdown.” Zawya; yet another Dubai business leader is being questioned over financial irregularites in the property sector. Financial Times; sales of off-plan property have all but dried up, and many properties are back on the market at or below the original price. Property prices falling in Dubai.

The Dubai government has taken some major steps to ensure the market does not collapse completely, but with such a wealth of conflicting information being disseminated, and no true transparency, until such times as the government deals with these issues, Dubai’s property market will continue to fall.