Good-Bye Dubai?

There have been a number of articles about young US and UK bankers relocating to the Gulf. They think that they are surfing the financial waves to a new safe harbor but they may only be the flotsam and jetsam floating on the crest of the financial tsunami flooding the financial world (talk about bad writing.)

Amlak freezes home loans – The National – Rupert Wright and Sarmad Khan – 20 November 08

Amlak, the country’s largest home lender, is suspending new loan applications until further notice as it carries out a full review of its portfolio…

There are fears that other lenders could follow suit. “This is bad news for the market, very bad news,” said Chris Dommett, chief executive of John Charcol Dubai, a mortgage advisory firm. “It’s almost certainly down to liquidity, I think they don’t have funds to lend. It sends a very negative message to the market at a time when they need some sort of positive news.”

Property prices fell last month by 4 per cent in Dubai and 5 per cent in Abu Dhabi, according to data from HSBC Bank. With a squeeze on credit, both existing buyers and those hoping to acquire new loans may be unable to proceed with their purchases. Property developers are already feeling the pinch and laying off staff, with 200 jobs cut at Damac alone last week. Further job cuts now look likely. Amlak is in merger talks with Tamweel, the country’s second largest home lender…Tamweel and Amlak have both been instrumental in supplying a financing need to the market,” said Salwa Hammami, head of research at Arquam Capital, a Dubai-based investment bank. “But there are no buyers at all. There is no demand and no transactions. The market is stagnant as far as buying and everybody wants to get rid of their apartments.”

…Banks have been reluctant to pass on the Dh120 billion (US$32.7bn) that has been made available in emergency lending by the Ministry of Finance over the past four weeks. Banks have been tightening their lending criteria and demanding higher and restrictive downpayments, sometimes as high as 50 per cent of the purchase price. They are also reducing consumer lending, including car loans. “The market needs to mature into an end-user market,” said Ms Hammami.Developers promise property buybacks

Developers promise property buybacks – The National – Nathalie Gillet – 14 November 08

Some developers caught in a stagnant market have been attempting to lure customers with promises they will buy back property at a higher price a few months after a sale, guaranteeing the deal with postdated cheques.

…Despite signs these sorts of deals are growing increasingly common, few developers were prepared to admit they have offered them, partly because in some places the deals could be legally questionable.

…”Basically we are trying to give confidence to the buyer because prices are going up,” Mohammed Noorul Haq, chairman of Dubai-based developer Sanali Group, said. “We just started using this. We are giving a choice. You can sell the property at a higher price or we can resell it for you at a higher price in six months’ time. If we can’t do that, then we will buy it from you at a fixed price.”

The deals carry several risks for both sides. In at least one jurisdiction, Dubai, they may be legally questionable, since property brokers are not allowed to offer structured investments, only property.

“This sounds like an investment,” said Marwan bin Ghalita, the chief executive of Dubai’s Real Estate Regulatory Agency. “Developers are not supposed to do investment business. Their licence is to develop land and sell it, period. End-users should be cautious.”

…An agent at JCA Real Estate, a Dubai-based broker which also operates in Ajman, said: “We are asking for the total amount in cash and give the client a postdated cheque on behalf of our developer, with 10 per cent profit after one year. But the client has to pay everything immediately.”

One investor said he had received a different offer at an Ajman property exhibition last week.

“I was offered to pay 10 per cent in exchange for a contract, saying that after six months I would get 40 per cent returns and a postdated cheque,” Steven Zhang, a Chinese businessman, said.

…Experts say the buyback deals could simply be postponing existing problems of developers, or amount to an act of desperation to raise cash needed to continue operating in the short term.

“It is known in the market,” said Benoît Demeulemeester, managing partner at Dubai Strategic Partners Middle East, which specialises in financial strategy. “But developers who are doing this when the market is going down will be put in an even more difficult position than they already were.”

He said the rate of return promised, 20 to 40 per cent, makes no sense in terms of risks and compliance.

“We could compare this with derivatives or options,” said Mr Demeulemeester. “The returns are beyond any financial model.”…

Developers say they will scale back activity – The National – Bradley Hope – 13 November 08

Dubai’s largest property developers say they are cutting back on activity and reviewing the project timetables in response to the worsening economic climate…

“There is a recession hitting the whole world and some projects in Dubai are being delayed and some are being cancelled,” said Imad al Jamal, the vice chairman of the UAE Contractors Association. “We are having to curtail expenses and regroup resources.”

Nakheel, the property developer behind the iconic island developments that are becoming synonymous with Dubai, also said it would be “scaling back” some projects.

“We are witnessing a global negative economic movement, and while we believe that the economic fundamentals of Dubai have not changed, we also believe that we have a responsibility to aid this market maintain healthy momentum,” a spokesman said. “This involves reassessing our immediate business objectives to accommodate the current economic climate. The next few months will see a scaling back of activity around some of our projects.”

Nakheel would not identify projects that could be delayed, but in recent weeks it has said activity on Palm Deira and Palm Jebel Ali had shifted to the areas closest to the existing shoreline to allow for progressive sales launches.

Analysts said projects likely to be affected included the island developments that have yet to begin, such as The Universe – a planned archipelago abutting the 300 islands of The World.

Union Properties, the developer behind the towering Index building and MotorCity in Dubai, said it had eased the payment plans for some developments and would not announce “any new project until we are clear on the status of the credit market and the appetite of banks to go back into lending”, according to Zaid Ghoul, the chief financial officer…

Damac Properties said it had awarded 60 contracts in the first nine months of this year for construction of projects, but a review of its website shows six buildings finished or nearly finished, 24 in the early and middle phases of construction and 44 projects without significant progress. Earlier this week, Damac announced 200 layoffs, or about 2.5 per cent of its workforce…

Emaar Properties, which announced new payment plans on Wednesday to boost sales, said yesterday it was reviewing its recruitment strategy as part of plans to “reorient our growth strategies and align our business model to tackle new realities”…

Limitless, which is building a Dh11bn canal that eventually will, be the centre of a city with an estimated 1.5 million people, said it was reviewing the pace of development “on a continuous basis” and would adjust to “reflect market conditions”.

Major Abu Dhabi developers, including Aldar Properties and Sorouh Real Estate, said they were still reviewing the economic situation and had not decided whether to ease payment plans to help buyers.

Adel Lootah, the executive director of the Dubai Property Society, said transparency was the key to restoring confidence during this period.

“We need a little bit more communication from the government, the main players and the financial institutions,” he said. “This is a difficult time.”

Emaar eyes cuts amid Gulf property slump – Financial Times – Simeon Kerr in Dubai and Daniel Thomas in London – 13 November 08

Emaar Properties, one of the world’s largest property developers, is preparing to cut jobs to help it steer through the biggest crisis in its 11-year history amid a sharp fall on Dubai’s stock markets and a cooling of the Gulf state’s property sector.

The company, which accounts for about 10 per cent of the Dubai stock market, on Thursday said it was reviewing its 5,000-strong workforce in light of the weakening Dubai property market, which is declining for the first time since foreigners were allowed to buy property in 2002…

The company, which is partly owned by the state, became the poster child for Dubai’s booming property market, which has been constantly raising the bar for building the biggest, best and fastest.

However, the six-year bull run in Dubai property prices has run out of steam as the global financial crisis washes up in the Gulf, with HSBC this week saying residential prices had fallen in October for the first time since 2002…

It has sought to diversify outside the core Dubai development market into a wide range of businesses around the world, from estate agency chain Hamptons International in the UK, John Laing Homes of the US and the Armani hotels business, as well as assets spanning residential, healthcare and education.

Emaar, the bellwether on Dubai Financial Market, has slumped almost 80 per cent this year amid a widespread Gulf selloff as investors flee equities in a reversal of the exuberance surrounding the Gulf’s emerging markets last year…

Cracks start to show in property market – The National – Rupert Wright and Angela Giuffrida – 12 November 08

The organisers of the Property Shopper Show, which opens Thursday at the Grand Hyatt Hotel in Dubai, are putting on a brave face…

event”. However, they must secretly be fearing that there will be a dearth of visitors and a line of empty booths. The timing could hardly have been worse. For the past few months, there has been growing concern about the country’s property market. After years of breathless expansion, with property prices falling around the world, wise voices counselled that the same thing could happen here. But while estate agents warned of slowing demand, they promised a “soft landing”.

In the summer, developers were trying to quell speculative purchases, warning that they only wanted buyers who were prepared to live in the buildings. There was talk that home-loan providers were asking for larger downpayments from purchasers, but just about every industry expert agreed that there was no need to panic.

That approach is now looking optimistic, if not downright misleading. Dubai’s once booming property market is in turmoil. Six months ago, the car parks outside property shows were full of people fighting to buy apartments; today, interested buyers could probably fit into one space. What developers would do for any buyers, however speculative. According to HSBC Bank, Dubai property prices fell 4 per cent in October – with villas falling by 19 per cent in four weeks from September to last month alone. Property prices in Abu Dhabi have even started falling. According to HSBC, prices were down 5 per cent last month.

Faced with a shortage of buyers and a deluge of distressed sellers, developers have started cutting jobs. Damac Group, the owner of private developer Damac Properties, said it would cut 200 jobs. Emaar Group, the bellwether of the Dubai property scene, has yet to lay off staff, but the stock market is drawing its own conclusions about the state of the company. Its shares fell by 10 per cent yesterday, and it is the second worst performer of the Dubai Financial Market this year, down 77.38 per cent.

The Cityscape event, which took place just six weeks ago and was full of announcements of major projects – including a tower more than 1,000 metres high – now seems a dim and rather distant memory belonging to another age.

Six years ago, the scene was very different. Government-owned companies such as Nakheel and Emaar Properties were wowing the world with man-made islands and a skyscraper that is now the tallest in the world. The publicity that surrounded the English footballer David Beckham’s purchase of an off-plan villa on Palm Jumeirah when he passed through Dubai en-route to Japan for the 2002 World Cup finals did wonders for the project. He gave it to his parents as a gift.

Also good for sales was the promise of a freehold law opening up property ownership for foreigners who relished the idea of tax-free status.

New and ambitious privately owned developers emerged, all wanting to emulate Emaar, Nakheel and Dubai Properties.

Few of the newcomers had the scale or financial backing of their more robust counterparts, but believed that the formula of launching a succession of projects, each tagged with the word luxury and selling off-plan, was the winning one. Aldar, Sorouh and TDIC became the pillars of Abu Dhabi, offering replica projects. They were joined by Rakeen and RAK Properties, of Ras al Khaimah.

British buyers were the first to arrive, flush with cash after a surge in the value of their properties back home and looking for reliable sunshine. Other Europeans followed, particularly Russians, who now make up the largest group of property investors in the UAE. Relatively cheap prices, favourable payment plans and more banks offering mortgage deals meant each new tower was sold out quickly, sometimes within 24 hours.

Property prices were fuelled by speculators, who were “flipping” their property before even making a second instalment, and making a killing.

But as construction costs rocketed, cracks in the market started to surface. Such signs emerged towards the end of 2006. Developers who sold off-plan at cheap prices could no longer afford to build their projects. Contractors, having not been paid, walked away, leaving some projects unfinished.Some developers, unable to complete their projects, disappeared. Others exploited the appetite for property from international investors to sell developments that were never likely to exist.

The creation of the Dubai Real Estate Regulatory Authority (Rera), followed by the escrow account, in which developers have to deposit all money collected from investors and spend it solely on construction, went some way to reassure buyers, although only projects launched from last year onwards are covered.

New regulations and better transparency also gave investors more confidence. But despite rising building costs, a shortage of good contractors and skilled staff, as well as issues with connecting power and water to projects, developers just kept looking to build.

How times have changed. In a bid to counteract slowing sales, Emaar yesterday announced it was easing payment procedures for buyers. Nakheel has also relaxed payment conditions, while RAK Properties is being more flexible with buyers who struggle to meet payments.

Abu Dhabi developers are also reconsidering projects. Sorouh is accelerating the delivery of projects, while looking to secure long-term income from rental rather than sales. Al Qudra Holding is targeting middle-income buyers as opposed to the high-end market, while the liquidity squeeze has prompted TDIC to review its yet-to-be-announced projects.

The Dubai Government has set up a committee to review the feasibility of major developments. Aldar Properties, like most other firms across the Emirates, is taking a more cautious approach, although all remain outwardly confident that the strong fundamentals that make up the economy will shield them from a severe storm.

Some analysts predict a wave of consolidation across the industry, with the big players snapping up struggling ones.

Other industry experts say the slowdown is a good thing. Not only will it weed out speculators, but it will lead to a more stable and normal market, where people buy homes to live in.

It is not as though the buyers have disappeared, particularly in Abu Dhabi. The city is yet to build enough houses to satisfy demand. While there are reports of distressed sellers being forced to liquidate their holdings because they need their deposits back, others are searching for villas, have arranged the financing, but cannot afford the asking prices.

While the Government has been quick to follow up allegations of fraud in the construction and financing industry, it has been surprisingly tightlipped on the unfolding property crisis, which makes up about 30 per cent of Dubai’s economy.

But there are finally signs that the authorities are aware of the problem – and starting to act. At a Central Bank meeting on Tuesday, the board discussed a proposal for introducing financial vehicles for dealing with property loans. The fear is that a further drying up of credit – or people panicking and withdrawing their deposits – will have a knock-on effect. According to the Central Bank, banks hold Dh142.5 billion (US$38.79bn) worth of property loans.

A weakening property market could set off a chain of defaults, and losses for everyone in the business. At least if anyone shows up at the Property Shopper Show at the Grand Hyatt, they will have something to talk about.

Dubai’s Palm property prices fall 40% – The National – 20 November 08

Property prices on Dubai’s Palm Jumeirah island have fallen as much as 40 per cent since September as buyers struggle to get mortgage loans amid the global credit crisis, property brokers say.

…Nakheel said earlier this week it was witnessing a slowdown in the rate of property sales and last month announced it had scaled back dredging work on its massive Palm Deira project, the largest of three palm archipelagos that is planned to house more than 1 million people.

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