Investments

The world’s luxury property markets have taken a massive hit lately due to the economic downturn and financial global crisis and none more so than Dubai - the once home to the Miracle Boom.

Lately, Morgan Stanley has come out with some very dire predictions on Dubai claiming that “”it is worse than expected”" - this post looks into their arguments and where they have these from.

The Luxury Property Blog reorts :

The latest Morgan Stanley UAE property sector report is out and is not pretty reading. “Fallen off a cliff,” and “Worse than expected,” are not words one usually associates with the Dubai luxury market. So if Morgan Stanley have come clean, it might actually be accurate. The issue with Dubai is always lack of transparency and even MS are resorting to “anecdotal evidence,” of which there is no shortage.

Around $263 billion worth of real estate projects have been delayed or canceled as the UAE’s property sector is dealt a “worse than expected” blow by the global financial crisis, according to their report.

HSBC research reported recently that cancellations had reached $75 billion in Dubai alone, but a Morgan Stanley spokesperson said HSBC had failed to include three further large projects in its assessment.

The author of the blog does emphasize what this blogger has also personally witnessed lately namely that most of the information on Dubai and its troubled real estate sector is indeed anecdotal and not factual though there is admittedly so much of it that one would believe that something is not right :

Some of the project cancellations that have been officially announced are Sunland Group’s $654 million Atrium project and the $790 million Trump Tower project by Nakheel on Palm Jumeirah. Prices are falling dramatically as the sector is hit by job losses and project delays. A few choice quotes:

“Real estate prices in UAE capital Abu Dhabi are down by an average of 20% since a peak last summer as the UAE’s property sector is hit particularly hard by the global economic situation.”

“Residential property prices in Dubai have also fallen, by 25% in the last 4 months alone, with high-end real estate units taking the biggest hit.”

“Since September, Dubai apartment prices have fallen 25% and villa prices are off 26%, “belying the argument of some developers about the price resilience of villas and low-rise building segment.”

“Anecdotal evidence suggests sharp falls in transaction volumes in the fourth quarter due to deteriorating economic conditions, the disappearance of speculative buying and the lack of financing.”

“Prices of high-end Dubai properties including those at the Burj Dubai development that includes the world’s tallest tower, which reached its final height last week, as well as the man-made Palm Jumeirah are down 35% since their peak”

Emaar Properties is likely to be the “worst affected” among Dubai developers by the sudden plunge in prices.

“We believe that Emaar runs a high risk of sales returns and defaults among its recent launches.”

“The company’s high-end developments, the Burj area and The Old Town, have taken the biggest hit since the peak.”

Many analysts are predicting further falls in prices in 2009 for luxury property in Dubai, Khajeel Times is suggesting 50%, The Global Financial house only 30%.

Gulf Times of Doha, Qatar reports that property investors have called on Dubai’s real estate watchdog to act quickly to avoid a “complete collapse” of the sector :

“”amid growing fears on the financial strength of some developers and their ability to deliver more than $1tn worth of projects. “”

The article goes on to suggest that The Dubai Property Investors Group wants the official Dubai real estate authority, RERA, to rid of the fly-by-night investors and bring some order to the sector :

The Dubai Property Investors Group, made up of more than 300 local and international investors, lawyers and real estate developers, has delivered a petition to Dubai’s Real Estate Regulatory Authority, or RERA, to urge the watchdog to clamp down after a slue of corruption scandals raised concerns over standards.
The group is targeting “fly-by-night developers” that aren’t able to deliver projects amid tightening liquidity and project financing, even though they’ve taken down payments from investors.
“Any measure short of announcing which developers are bankrupt will continue to let real estate prices free fall,” the petition seen by Zawya Dow Jones says. “We do not want to make any more payments until we have proof that the developers have the financial ability to deliver our units.”

Transparency is also something that is needed and demanded :

“Sentiment amongst real estate investors in Dubai is very poor right now,” said Eric Swats, a partner at Dubai-based investment bank Rasmala Investments. “RERA needs to be as transparent as it possibly can, but also to allow the market to adjust to the new realities as quickly as possible.”
Last week, a Morgan Stanley report said $263bn worth of the UAE’s $1.25tn construction projects have been delayed or canceled.
Separate research carried out by the Dubai-based market research firm Proleads said $582bn worth, or 45%, of the Emirates’ projects are currently on hold.
Sentiment has worsened since a spate of damaging real estate scandals that led to the arrest of several prominent executives in the industry over the last year in Dubai.

The article concludes through quotes that lack of real demand and huge over-supply are two of the worst enemies to bring the market back to parity :

In the petition, the investor group urges RERA to cancel more mega-projects such as the $110bn Dubailand development and Nakheel’s Waterfront “until real demand exists.”
It says with thousands of people leaving Dubai on a daily basis as financial and real estate firms lay people off, oversupply is a real concern. “Cancelling of projects will reduce supply, increasing prices, but more importantly will increase confidence in the emirate that government is prudent,” investors say.
The group is also concerned that some developers are abusing recently introduced laws, which say that all money deposited into escrow accounts must be used for construction.
They say some developers are “illegally siphoning money” from the accounts for administrative or marketing costs, or for land payments to master developers.
Investors add that the new interpretation of existing laws by RERA in November no longer protect them if they default on payments.
At one time, investors were entitled to a minimum of 70% of any money paid to a developer if they defaulted, but the group says RERA’s new interpretation of the law means the developer will keep 30% of the total contract value if an investor defaults.

Will Dubai get it right and rectify what is a potentially devastating situation for the once famed Miracle City, or instead keep, to a large extend, pretending that nothing is wrong and cannot be saved by improved market conditions, or will it in fact become a ghost town thanks to the exodus of expatriates and workers, or perhaps even be bailed out by an oil rich Big Brother from Abu Dhabi or Saudi Arabia ?

Time will show and options are plenty but it remains a fact that if Dubai wants to remain a point of attraction for private as well as institutional investors it has to act now and with full force and transparency.

How it all works, Middle East Business, Real Estate Investment Dubai real estate, Emaar, Luxury Real Estate, Morgan Stanley, Nakheel, RERA

For many years luxury real estate world-wide has had a fantastic time with soaring prices and strong demand, be that from the shores of Dubai till European top destination, the US and The Far East.

Last year the global economies and markets collapsed and with it the real estate sector, in fact it was the overheated  and over mortgaged US housing market that started it all. It would therefore seem only natural if luxury real estate plunged even deeper than ordinary real estate as times got tough but some seem to argue that luxury real estate is still doing well despite global crisis, credit crunch and financial scams.

This post takes the temperature on the luxury real estate market and how it is faring globally.

Shannon Molloy of Brisbane Times, Australia has an article about the dried up luxury real estate market and says:

Brisbane’s prestige property market will ‘languish’ this year as former corporate high-flyers rein in their spending, according to experts.

The top end of local real estate has enjoyed soaring prices and strong demand for several years, but RP Data researcher Cameron Kusher believes the good times are over.

Holiday homes, executive apartments, luxury property and tourism-driven investments could soon flood the market as the global financial crisis and economic uncertainty force owners to sell, Mr Kusher said.

And demand for million dollar homes looks certain to dry up thanks to factors such as poor company profits, lower than expected bonuses and losses in the stock market, he said.

“As a result of these changes in the top end, there will be a lot more forced sales… the affluent-type markets are likely to languish,” Mr Kusher said.

The article goes on to quote local experts for saying that long-term the market shall recover its value but short term remains grim:

Mr Greensill said demand for luxury homes had been in “almost free-fall” for months, but he did not believe there would be a long-term drop in values.

“Now is not a good time to sell a prestige home, so meeting the market requires a significant drop in price… but I think values will hold steady in the long run,” he said.

Jens Fischer of Pravda, Russia is one of the optimists and he argues that the European luxury real estate market has remained stable and not lost its value and appeal :

Many people think that if there is a crisis, crisis is everywhere. However, there are several sunny islands in the storming ocean, that keep prospering and attracting survivors. Name of one of them is Luxury Real Estate. The American real estate crisis has reached Europe – a fact that cannot be denied on the one hand but that has to be seen in different ways. Whilst prices in many regions and countries in Western Europe for standard houses have dropped up to twenty-five percent in 2008, which applies to almost all countries in Western Europe, the luxury market remains relatively stable. No substantial consolidation can be seen here, nor do experts expect a consolidation period to come during the next months.

The European luxury property market mainly refers to properties in traditional, posh, sought-after and highly reputable prime locations throughout Europe. Prices ranging from 1 million Euros up to more than 125 million Euros are being paid to some of the most exclusive freehold houses and mansions currently on the market in France and Spain and 750k and more for exclusive condos. Such properties usually qualify as luxury consumer goods pretty similar to sports cars, yachts and jewellery, and therefore are less influenced and affected by the general market downfall. Buying these properties is of a rather more emotional than of a reasonable nature and as a result is subject to differing behavior.

Professional real estate blogger and writer, Mark Knowles, disagrees with Mr Fischer in his comments to the latter’s positive views on luxury real estate and has the following to say to him:

Much as I hate to rain on anyone’s parade (not true), I feel I must break some bad news to you Mr Fischer - London luxury propertyprices fell 20% last year and are continuing to decline rapidly. I personally can introduce you to a Russian aluminum magnate who will sell you a villa in Italy, just over the border from France’s Cote D’Azur, that was bought last year for E 3.5 million that he would cheerfully take E1.5 million for. Roman Abramovich will sell you his yacht Pelorus for any sensible offer, and the previously mentioned aluminum magnate has already taken his boat out of the water and fired all the staff.

UBS Bank of Switzerand’s shares fell again todayafter the SonntagsZeitung reported  they had made $7.2 billion in losses in Q4, bringing their total losses for the year up to almost $20 billion; the biggest Swiss corporate loss on record. No comment from the bank apparently.

Hardly seems worth discussing Marbella, but there are now a few “interesting,” property scams coming to light in the Spanish markets. A British politician is calling for an equiry into Ocean View Properties, a British property company that transferred £100 million to a Spanish developer which then evaporated (the money not the developer). The deal was apparently brokered and arranged by convicted fraudster Sean Woodhall, who conveniently disappeared in a light aircraft crash in Brazil last May. No bodies were recovered, but the Spanish developer claims to have paid back the money. There have been a lot of these recently - last month aloneFortuna Estates were busted for land fraud and Aifos, a Marbella-based developer was forced into recievership by one of their creditors. The owner and Managing Director of Aifos were both arrested for fraud some time back, but the failure of yet another developer Tremon apparently prompted the proceedings. Unravelling the mess of the Spanish property markets  is going to take years.

Deidre Woollard of Luxist.com explains how the once untouchable and in-demand London and Manhattan luxury real estate markets have also suffered lately :

A recent article predicted continued gloom for the California real estate market this year but two other expensive markets are also in peril. The high-end market in Manhattan, once believed to be impervious to economic doom, spent the last quarter of 2008 catching up to the rest of the world. Properties that once would have been snapped up in days for a price close to list have now sat on the market for months and faced deep price cuts. A report from Prudential Douglas Elliman reveals that the median sales price of a luxury apartment (defined as the top 10 percent of the market) fell nearly four percent to $4.02 million in the fourth quarter of 2008 compared to last year. The top of the market is likely to continue to weaken as the fallout from failed banks and Wall Street firms continues to be felt. Our Sunday real estate round-up continues to show buying from financial fat cats but many are trying to sell their apartments for readily available wealth. StreetEasy.com says that almost 42 percent of the 259 Manhattan homes currently listed for $10 million or more came on the market since September. What affects Manhattan also affects the Hamptons with vacation and second homes searching for buyers that may be less ready to invest in something for pure pleasure.

It’s not much better across the pond. Bloomberg reports that luxury home values in London’s nine most expensive neighborhoods fell almost 17 percent last year. Like New York City, London is a big financial center and the loss of jobs in banking, finance, insurance and related industries is having a big impact on the market. The real estate brokers at Knight Frank report that the number of houses and apartments sold for at least 1 million pounds last year fell 49 percent from 2007’s record number. Overall it is predicted that London luxury housing values could fall by 30 percent by the time the real estate slump hits its inevitable bottom.

Yusuf Abdullah of  Media Monitors Network has this interesting report into the much talked about Dubai real estate scene of which quite a lot can be categorized under the luxury umbrella :

The property bubble in Dubai has burst as credit has become scarce and international investors have scrambled to dump their assets to minimize losses. That may shatter Dubai’s goal of creating a sustainable economy by building the Persian Gulf hub for finance and tourism, forcing it to depend on oil-rich neighbor Abu Dhabi for financing. The rulers of Dubai had speculated that the price of oil would perhaps continue its upward surge–it had reached $147/barrel before its precipitous fall to $40/barrel or less in recent days. With Dubai’s reserves at a paltry 4 billion barrels compared to Abu Dhabi’s 92 billion, Dubai is more vulnerable to such price fluctuations.

Banks have tightened lending or frozen it altogether. Amlak Finance PJSC, one of the biggest mortgage lenders in the UAE, announced on November 19 that it had suspended new home loans. London-based Lloyds TSB Group Plc stopped offering mortgages for apartments in Dubai on November 11 and reduced the amount it will lend for villas from 80 percent to 50 percent of the price. This has naturally had a negative effect on property values. For instance, in November, the cost of a seven-bedroom villa on Palm Jumeirah dropped to 19 million dirhams ($5.2 million), still an exorbitant price, down from 30 million dirhams in September, according to the Dubai unit of German real estate company Engel & Voelkers AG.

Simon Packard of Bloomberg confirms that the London luxury real estate market is not in a good condition:

Luxury home values in central London fell in 2008 by the most in more than three decades as the worst banking crisis since World War I decimated demand from the city’s financial professionals.

The average value of a house or apartment in London’s nine most expensive neighborhoods fell almost 17 percent last year, according to Knight Frank LLP, which tracks prices dating back to 1976. Values declined 2.2 percent in December, the ninth consecutive monthly drop in an index that mostly covers homes costing at least 1 million pounds ($1.5 million).

Demand for residential property in the U.K. capital has waned amid a worldwide credit crisis that the research firm Oxford Economics estimates could cost London 60,000 jobs in banking, finance and insurance by the end of 2010.

“The market’s fortunes will be driven by economic conditions — especially those in the City,” said Liam Bailey, Knight Frank’s head of residential research, referring to London’s main financial district.

Worst hit so far have been homes worth up to 2.5 million pounds, a segment of the market where values fell 22 percent last year. Homes in that tier are favored by financial professionals who have been hit with job losses and “fears of further job cuts in 2009,” Bailey said.

The flip side of this negative status quo and short term outlook for the luxury real estate market is of course that it offers a tremendous buying opportunity for the cash rich and affluent investor so if you are looking for your dream luxury holiday or retirement castle and you match this profile of sitting on a mountain of cash, now is not a bad time to go shopping !

Real Estate Investment, UK Investment, US Investments Dubai real estate, London, Luxury Real Estate, Manhattan, Mark Knowles