Dubai Shows What A Property Plunge Really Looks Like

Here's essentially what caused Dubai's debt extravaganza to finally come to an end.

Far too much easy money flowed into Dubai during previous years, fueling a massive construction boom financed with debt. For awhile this debt looked sustainable to those involved because it was ostensibly backed by valuable property.

Yet when the global financial crisis hit, property prices fell in many parts of the world. Dubai property prices were hit especially hard.

As shown below by the skiing Emirati, Dubai property rates per square foot fell 45% from Q3 2008 to Q3 2009 according to Colliers International.

Thus just as many American's went underwater on their mortgages due to the American property crisis, owing more to the bank than their house was worth, the same thing basically happened to the Nakheel property business of the Dubai state-owned conglomerate Dubai World.

Combined with near-term cash flow constraints, this finally forced Dubai World to admit to its creditors that it would not be able to meet all of its debt obligations.

What is happening in Dubai Property Sector?

With Dubai property sector undergoing a transitional phase, companies are reviewing their project strategies, and developers are more cautious with their future investments on projects, as several mega-developments are now being reviewed.

For instance, Nakheel has announced that parts of the Dh.350bn Jumeirah Garden City, the Trump International Hotel, the Tower on Palm Jumeirah, and the kilometer-high tower will be put on hold.

Even work on 'The Universe' will be restricted to preliminary studies, Nakheel said. Decrease in liquidity and financing has led to delay in progress of such projects, resulting in these projects bearing the brunt of financial turmoil. The mega-projects that had earlier brought about a property boom in Dubai, have now been put on hold.

Limitless too, revealed that it is reviewing construction schedule of Arabian Canal. The Head of Dubai's RERA, Marwan bin Galita, said that developers need to review their projects which are yet to be launched for sale. Recession is a very crucial phase, and RERA had been urging developers to do this about a year back, Galita said.

The Chairman of Crisis Management Committee, Mohammad al Abbar, last week said that it would pull back on its building spree due to the current financial crisis. Apart from backing out of its projects, Nakheel has also laid off 500 employees, constituting 15 percent of the company's work-force. All the 500 employees were offered redundancy package, including outplacement support services to assist them during this transitional phase.

Better Homes, Damac and Omniyat too, have followed suit, with Better Homes axing 50 jobs, Omniyat with 69 jobs, and Damac laid off 200 jobs, with the drop in demand for properties.
Meeras however, said that it does not have plans for lay-offs at the moment.

According to analysts, about 819 employees have lost their jobs in the Dubai real estate sector till date, with more to follow. However, the Head of Research and Consultancy at Cluttons, Matthew Green, said that these happenings are not restricted to the realty sector alone, and few other major corporate too, have announced staff reductions.

In the meanwhile, the time is now appropriate for small developers to join hands to bring confidence back into the market, say analysts.

A member of Financial Crisis Committee said that Dubai has been witnessing plenty of defaults on high-end properties with worsening financial conditions, and there are possibilities of merger among smaller developers. Even Head of RERA, Marwan bin Galita, agrees that merger between small companies would bring in more confidence, as good mergers in any sector adds more value to the sector.

The developers, Union Properties and Deyaar, although denied talks about any plans of merger, they were unable to comment on whether the government would order their merger.

Secondary prices in Dubai and Abu Dhabi fell 4 to 5 percent in October from the previous month, while the villa prices of Dubai dropped by 19 percent, under strict lending conditions, according to a recent HSBC statement.

The "off-plan" market is not doing too well, due to market speculations. Few of the banks have stopped financing, while few developers are said to be demanding exorbitant prices. However, the prices of "affordable" off-plan properties may pick-up during second quarter of 2009, if the banks improve on their lending, Bin Galita said.

RERA is likely to implement a new law on registration of off-plan properties next week.

On the whole, Dubai real estate sector has met with stringent mortgage lending measures, liquidity crunch, and real estate slowdown during recent months. The indications of property boom in Dubai, have atleast, temporarily halted, and developers are seen scaling back on their projects, while jobs are cut and property prices have plummeted.

How Dubai has lost its sparkle for one UK jeweller

For successful London jeweller Nadeem Osman, Dubai had all the bling in the world. Like thousands of others, he loved the city's fast life, with its sports cars, glitzy shopping malls and super-luxury hotels. And, of course, its sun and fabulous beaches.

The 37-year-old businessman from Balham, South London, holidayed there at least twice a year with his wife and even thought of moving there eventually, away from the rain and cold of England.

So 14 months ago, as an investment on the side, Mr Osman decided to buy four apartments in the city, which he planned to rent and also use as his holiday homes.
Losing its sparkle: Jeweller Nadeem Osman bought four flats in Dubai last year, just before the property market there crashed

Losing its sparkle: Jeweller Nadeem Osman bought four flats in Dubai last year, just before the property market there crashed

He paid £580,000 for two off-plan apartments in Villa Caria, a residential block in Jumeirah South, and two more in a proposed hotel on the Dubai Waterfront, known as Hotel K. But his timing could not have been worse, with the Dubai property market then going into free fall: down 32 per cent in the first quarter of this year and 47 per cent in the second, according to Knight Frank.

Assetz, a property investment company, estimates that the fall may reach 70 per cent this year. Mr Osman bought the apartments through Dynasty Zarooni (DZ) - one of the city's biggest real estate companies, with a portfolio of properties worth £219million.

He paid the full sum upfront, assured that the money would be put into an escrow account which protects a buyer's money until the work is complete.

In January, one of the directors of DZ was arrested on a £60million fraud allegation - and since released without charge - but work on Hotel K has not even started. It is scheduled to finish by 2011. The company does not even own the land on which it was to be built.

Villa Caria was supposed to be completed by the end of this year, but DZ has told him it may take a further two years. Mr Osman has also been told that his money was not put into an escrow account, and he is unable to get any back.

'I don't know what to do,' he said. 'If it was in this country I could do something about it, but in Dubai it's so difficult as there is a huge backlog in the courts.' Dynasty Zarooni has declined to comment after repeated attempts to contact it. Mr Osman has now formed a group with ten other investors to decide whether to take legal action or file a criminal case.

Dubai's courts are struggling with a mountain of property cases totalling £3billion - as much as £500million may involve British investors.

Stuart Law, of Assetz, says Britons, who were the largest Western investors, were partly responsible for the crash as they inflated prices through their highly geared buy-to-let schemes.

'We've known of properties that were sold again and again about ten times one after another - it was good as each person made a profit, but the person who was left with the contract at the last was in trouble,' said Mr Law.

Dubai Real Estate Could Fall Another 30 Percent

There will be no recovery in the Dubai property market in 2010 with prices falling up to 30% in 2010, according to an economist who accurately predicted the credit crunch.

Eckart Woerts, a senior economist at think tank the Gulf Research Center who is currently lecturing at Princeton University in the US, said the global economy is in for a big surprise and as a result the already depressed real estate sector in Dubai faces more misery.

‘Are we out of the woods in Dubai? I don’t think so.

There are so many projects coming on stream. I don’t see a recovery.

My initial take was a decline of 60 to 80%.

We have had 50% so maybe we have another 10 to 30% to go measured against the old high,’ he says in an interview to be published in Arabian Business magazine on Sunday. (Nov 1)

‘A lot of the crash has already happened, but don’t think about the old highs, because that is a price you will not see for a very, very long time,’ he adds.

Unlike many economists predicting a recovery from the global economic downturn in 2010, Woertz said that a time lag between state stimulus packages ending and real demand picking up will cause further problems in 2010.

‘We have some stabilization going on, but the problem is this is mainly attributable to government spending and stimulus.

But what happens when the stimulus peters out? Because the job market looks awful.

So the spending cannot come from private households under such conditions,’ he explains.

‘For the real economy, we are in for a nasty surprise in 2010.

We could see several consecutive bottoms rather than a miraculous recovery,’ he adds.

But even when the global economy does recover it will not necessarily mean the start of an upturn for Dubai’s property prices, Woertz says.

‘Dubai has high inventories.

Just based on end user demand, without the speculative hype, you can probably have quite a few people moving back to the city without the market moving at all.

The point is, you shouldn’t calculate the price of real estate based on your opinion of the market and the hope that you will sell to a bigger fool than you for a higher price,’ he adds.

But he believes that the property market downturn could prove to be good news for Dubai in the long run.

‘It is good for Dubai that the real estate is going down in the sense that it was pricing itself out of the market.

It is a model trading hub. Dubai does things much more efficiently and better than neighboring countries.

There is a need and demand for business services made in Dubai.

But not at the price of yesterday which needed to be high because of ridiculous real estate prices,’ he concludes.

This article has been republished from Property Wire. You can also view this article at Property Wire, an international real estate news site.

Dubai’s real estate sector will continue to see price drops until the second quarter of 2010.

A recent report by credit-rating agency Moody’s claims that Dubai’s real estate sector will continue to see price drops until the second quarter of 2010. “The Dubai property market remains subdued following the fall-out from the credit crunch and the global recession,” it says.

Dubai rental prices decrease as some sale prices stabilise

Property units in areas seen as prestige developments and those that offer completed amenities and ease of commuting access to business zones have begun to see an increase in pricing, as buyers in the Dubai market continue to increasingly highlight differentiation between communities, according to a market report.

Properties on the Palm Jumeirah, which suffered some of the largest falls in price during Q4 2008 and Q1 2009, may be showing signs of stabilisation, driven by the slowdown in 'distressed' units coming onto the market, Dubai-based property services group Asteco has said.

40% decrease of Dubai property in Q1 2009 - Colliers International

Colliers International, the global real estate consultancy, has released the Dubai House Price Index (HPI) for Q1 2009, which indicates a decline in the overall index of 41% for the first 3 months of 2009. The index, compiled using mortgage transaction data from financial institutions accounting for 60% of the mortgage market in Dubai, also demonstrates a 34% year-on-year decline between Q1 2008 and Q1 2009. At the end of Q1 2009, property prices in Dubai had returned to approximately the same level as those recorded in Q2 2007.

John Davis, CEO, Colliers International, said, "Negative sentiment is the key factor driving the decline in the Index and the availability of finance continues to impact the market. End-users are concerned about job security and therefore unwilling to enter the market, even if finance is available to them, while the price/yield gap is tempting professional investors to wait for further declines. On a more positive note, the Index remained unchanged in March 2009. However, we would caution that it is too early to say whether the halt in the decline of the Index can be sustained, especially over the traditionally quieter summer months."

Colliers' analysis also highlights a key change in Dubai real estate market as professional investors, focused on the yield generated by a property, became the primary purchaser type as end-users and speculators fell away from the market. The HPI also analyses the trends for prices achieved for completed properties as opposed to properties still under construction.

New regulation likely for termination of off-plan contracts in Dubai

The Dubai Land Department has amended the Article 11 of Law No.13 regulating the Interim Real Estate Register, and this will be released in 15 days time. Once, released the new regulation is hoped to introduce provision for cancellation of contracts, and is hoped to benefit the market.

The department had already issued an internal circular during November 2008, wherein the circular stated that in case of termination of an off-plan contract, the developer can retain 30 percent of the contract value (30 to 70 percent of the amount paid), and that this would be applicable to amounts exceeding 30 percent.

However, in case of termination of contract, the developer of the property will retain the amounts paid by the buyer, until the real estate is sold.

The Director-General of Dubai Land Department, Sultan Butti bin Mejren, has said that the revised article would establish new grades for properties and developers, and would be more than the 30-70 rule, currently applicable.

The Law No.13, Article 11, which is currently applicable states that a developer is required to keep the Land Department informed, if a buyer breaches a sales contract. Thereafter the department would notify the purchaser personally or by registered mail or email, giving him one month time to fulfill the contractual obligations. At the end of the term, the developer can cancel the contract and refund the sum paid by the buyer, after deducting an amount not more than 30 percent of the total value of the unit.

Dubai Moves to Rein in Rents

DUBAI - Tenants whose home or commercial property is less than a quarter below the average price for a similar premises will not have to pay any increase in rent, according to a decree issued on Monday by His Highness Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of UAE, in his capacity as Ruler of Dubai.

Mohammed Ibrahim Al Shaibani, director of the Dubai Ruler’s Court said the decree was aimed at curbing the increase in property prices within the emirate to maintain a balance between the interests of both landlords and tenants and to ensure stability of the real estate sector, according to state news agency, Wam.

The decree, the Ruler’s first of 2009, provides for a freeze of rent prices in 2009 for tenants renewing contracts signed in 2008.

It states that the rental value of those properties must be equal to or less than 25 per cent of a corresponding rent average established by the rental index.

The guideline for the rental index was issued on Wednesday last week by Dubai’s Real Estate Regulatory Authority and is expected to replace the rent cap.

While the authority has issued a point system for evaluating the rental value of a property, the average rents for properties are yet to be ascertained.

“The evaluation process for all types of properties is based on giving each property points for various attributes such as building facilities, near-by retail outlets, age and condition of building, etc,” according to the Rera statement.

“These points are used as a statistical basis to set a minimum average and a maximum average rent price.”

The minimum average and maximum average rent price are yet to be declared and the status of the evaluation process has not been given by the authority.

However, the decree issued on Monday states that the rate would be established when the tenancy contract is renewed.

The ruling also defines a formula designed to generate lower rent values but allowing a proportional increase in 2009.

Another decree outlined the relationship between the tenant and landlord. The law, which came into effect on December 1 last year, has been amended. It includes points on the basis of which a tenant can be evicted, such as non-payment of rent or if the tenant is found subletting the property.

Dubai Property price growth rate slowing

Dubai: House prices in Dubai are still rising, but the rate of increase is expected to slow in the coming year, according to the latest research into the local property market.

There was an increase of just 5 per cent in the growth of house prices in Dubai in the three months to September, compared to the previous quarter.

But according to international property firm Colliers, the rate of growth in house prices has been dropping rapidly since the beginning of the year.

Although house prices increased by 43 per cent in the first quarter, by the second quarter the growth rate had declined to 16 per cent.

Growth in residential prices is expected to slow further as the year comes to an end.

Nevertheless, year-on-year growth in the third quarter was 80 per cent.

The negativity in the market is most notable, perhaps, on Palm Jumeirah, where prices have fallen by up to 40 per cent since September. Some previously much sought-after residences in the Burj Dubai area have also seen price drops of up to 30 per cent.

This phenomenon has been attributed to the fact that an increased number of homes is coming onto the market and loans are hard to come by because of the international financial crisis.

"I think [growth in the property market] is slowing ... but what's happened is the formation of micro-markets.

"For instance, values in DIFC, from a sales and a leasing perspective, are still strong," said James Knowles, director of sales and leasing at Asteco.

The volume of transactions so far in the fourth quarter are low, but this is because people are now more cautious about investing and limited money is available from lenders, Knowles said.

The 5 per cent increase in house prices is also not bad compared to other property markets that have slowed more drastically because of the international financial crisis, he said.

"On the one hand, the index results show a 5 per cent increase in overall residential prices for the third quarter, which is good news. On the other hand, over the past three quarters, the rate of growth has slowed to the point where we expect overall price growth to enter negative territory in the fourth quarter," Ian Albert, regional director for consultancy services, Colliers, said.

Buyers in search of a mortgage used to be able to get a loan for around 80 to 85 per cent of the home value. However, it has become difficult to get pre-approved loan-to-value property loans.

Loans in the 60 to 70 per cent region are now more common.

Knowles said this was not a bad thing, as speculation would decrease.

Dubai real estate NOT affected by negative equity problems

The full scope of the real estate meltdown in Dubai is not clear and will be evident only after a few months. The Gowealthy Research Team evaluated the Negative Equity Problem in detail and has noted that it has not affected the Dubai real estate market. The term Negative Equity implies a condition in which the value of the asset used to secure the loan slides below the outstanding balance of the loan. High interest rates and a drop in the property prices have forced small-time speculators to undersell their properties in Dubai. But after evaluating prices at the various freehold clusters, we have observed that although there has been a price correction of 30 to 40 per cent at Palm Jumeirah, Business Bay and Dubai Waterfront as well as several high-yield zones, Dubai does not face negative equity problems. Our study reveals that the Dubai Property Bubble has ended; property developers are either scaling back their new projects or discussing mergers/ take overs to grapple with the situation.

Currently expatriate buyers in Dubai are guaranteed mortgages of up to 65% of the total value of the property and national buyers over 80%. Property buyers cannot avail of full mortgage options. It is only recently, in 2007 to be precise, that home financiers and lending institutions started issuing flexible loan packages. Under such circumstances, the issue of negative equity does not arise because buyers are not allowed the total price of the asset as mortgage.

Following the global liquidity crunch, banks and financial institutions in the country have tightened their lending policies and raised interest rates despite government reassurances. A majority of such agencies have even stopped issuing mortgages. Why has this happened? Primarily because, the mortgage crisis-induced credit collapse has restricted banks and financiers from lending money to one another. To overcome the situation, the Government has come up with a 'rescue' plan and announced the merger of the country's top financiers, Amlak and Tamweel into the federally administered Real Estate Bank.

The abrupt disruptions in credit flow have affected both real estate developers and investors, resulting in a general slowdown of the sector. Yet, in stark contrast to reports that failure of risk and recovery models adopted by the region's banks and financing institutions led to the current credit crisis, we note that the bulk of funds were used to finance investment assets like shares and bonds.

Dubai property fall is unavoidable

The rapid deterioration in sentiment in the UAE has caught even the most pessimistic of observers by surprise.

Predictions that the once unshakable real estate market in the emirates, particularly Dubai, was set for a slowdown have come to fruition even more quickly than anticipated, despite the repeated assurances of senior Dubai officials that the market's onward march would not be deterred.

Reports have put the fall in property prices at 4 per cent in Dubai, and 5 per cent in Abu Dhabi, in August alone. Falls in September and October are likely to be even greater.

The first wave of redundancies at developers is now under way and project work is already slowing on some of Dubai's signature developments. By pulling credit lines to employees at some of Dubai's biggest companies, Emirates NBD, the region's biggest bank by assets, has signalled that it expects the market will continue to fall.

As the emirate's economic growth slows, more lay-offs will undoubtedly be announced.

The number of new workers arriving in the emirate will also dwindle, putting further down-ward pressure on real estate in the emirate.

Other banks in the country now face the choice of whether to try to attract the customers Emirates NBD is passing up, or also view them as too risky. Given that confidence in Dubai's real estate sector is now so low, they will be tempted to steer clear of customers who may quickly find themselves unemployed.

The Central Bank of the UAE says it is looking at ways to prop up the real estate sector, but it is difficult to see what it can do to persuade people to buy in a market that could be on the edge of freefall.

The best it can do is to allow the market to quickly find its floor, so the recovery can begin, and avoid falling into the trap of using government intervention to take on the impossible task of stopping a sharp correction in an overvalued market.