Morgan Standley on Dubai : Worse Than Expected
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
