The coming crash in Dubai’s insane property market

Friday, August 22nd, 2008

Talk about buying into the designer lifestyle. A spivvish man with a diabolical mien sits cross-legged on a Fendi sofa and glowers out of the pages of my Financial Times. On closer inspection, the ad turns out to be for apartments and penthouses in the Skygardens tower in Dubai’s international financial centre.

According to the advert, properties in the Amlak-owned building are ready to move into and have the added benefit of coming complete with furniture and fit-out by Italian design studio Fendi Casa.

In my view anyone tempted to transform their lifestyle in such an “off-the-peg” manner probably needs to have their head examined. That would be true at the best of times, but it’s even more true now given the current state of Dubai’s property market.

For all the evidence suggests that Dubai’s over-inflated property bubble has stretched beyond bursting point and that the emirate is poised to for a nasty property crash.

People foolish enough to invest in “Blingopolis” property in the past 24 months will have their fingers badly burnt, just as investors who came late to Spain’s residential market – where rampant speculation was also combined with unprecedented over-supply – have suffered since the Mediterranean country’s boom turned to bust earlier this year.

Recent reports suggest that Dubai, where foreigners were first allowed to buy property in 2002, is likely to experience an even sharper correction.

According to the property consultants Colliers International, the price of freehold units in Dubai soared by 42% in the first three months of 2008. And analysis by Standard Chartered Bank confirmed that the emirate’s residential property market has been inflated by dangerous levels of speculation.

The Asia-focused bank highlighted the lack of any price differential between properties bought “off-plan” (meaning either in planning or under construction) and those that are finished.

Completed properties normally command a premium, as buyers are able to move in straight away – or at least start earning an income stream by letting them out. The lack of any differential in Dubai suggests that the majority of the emirate’s “off plan” buyers are intending to “flip” their non-existent homes straight away.

Indeed, flipping has reached such a frenzied pace in the Emirate that it is not uncommon for apartments to have changed hands a dozen times before they’re even built. A recent article in the Wall Street Journal said this has driven Dubai’s Real Estate Regulatory Authority (RERA) to look at measures to prevent the practice.

Victor Najjarian, general manager of the Care Group, a Lebanon-based property consultancy, recently told the Lebanon Daily Star : “In Dubai maybe 90% of the market is speculative.”

The RERA may, however, be too late. According to Morgan Stanley, having risen by 79% since 2007, Dubai’s property prices are now set to crash by 10% by 2010. The investment bank added that, in a worst-case scenario, prices could follow the pattern of Singapore in the late 1990s – where prices plunged 80% in 18 months.

If this is doesn’t persuade property speculators in the emirate of the imminence of the coming crash, I don’t know what will. However, they might also want to listen to the words of Alexander Dibelius, head of the investment bank Goldman Sachs in Germany.

A former physician and former partner at McKinsey & Co, Dibelius recently said the fallout from the financial crisis is far from over. He believes that it is entirely possible another mortgage crisis could erupt somewhere else in the world, and suggested Dubai’s over-heated real estate market as a prime candidate.

Dibelius told Thomson Financial: “Even before skyscrapers are finished there, apartments within them have already been sold and resold three times – at a continually higher price. Few have stopped to ask themselves who really wants to live there long term,” he said.

Further reading:-

• The astonishing hubris, questionable taste and environmental naivete of the al-Maktoums,another post I wrote on Dubai, published on June 23rd, 2008
  
• Claudia Schwartz had this piece about the pressing need for a more integrated society in Dubai in The New Statesman on August 20th, 2008
  

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Posted by Ian Fraser on Aug 22 2008. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry