Has the bubble burst?

Nov 27th 2008 DUBAI
From The Economist print edition

As the sheen comes off glitzy Dubai, the other Gulf states are getting nervous too

“THEY said you couldn’t create islands in the middle of a city,” shouts a property advertisement over a jammed Dubai motorway. “We said, what’s next?” The range of answers has become gloomier by the week, as the debate moves from whether the Dubai property bubble will burst to just how bad it is going to get. Some nervous bankers think property prices could fall by 80% or so in the next year or so. A few months ago, rich foreigners who had bought villas in Dubai were complaining about the quality of the sand on their artificial beaches or the difficulty of getting water to circulate around the twiddly fronds of the man-made island shaped like a palm. Now prices for some smart developments have been cut by 40% since September, shares in property firms have lost 80% of their value since June, and big developers are laying people off.

The region’s banks will suffer too. Gulf policymakers are still making cheery statements about the region’s limited exposure to subprime loans but are quieter about heavy investments in inflated local property markets by regional banks, particularly Islamic ones. But worried banks are sharply reining in their mortgage lending. A series of arrests of senior businessmen as part of a fraud investigation is also making people twitchy. There is even talk of a coming “Gulf Enron”.

While the stunning opacity of government economic data is increasing the air of uncertainty, Muhammad Alabbar, who heads Emaar, a giant state-controlled property developer, took the rare step of telling people how indebted the country is. Together, the government and state-owned enterprises owe $80 billion—148% of GDP. Dubai still has a far larger stock of assets, at least some of which are likely to be sold, to cover the debts, to Abu Dhabi or the federal sovereign-wealth fund of the seven-state United Arab Emirates, of which Dubai and Abu Dhabi are the two richest.

The rest of the Gulf has met Dubai’s phenomenal boom with a mixture of envy and emulation. Now there are hints of pleasure at the idea that the epicentre of bullishness may be humbled. But there are worrying questions for the others, too. Could the Dubai property slump prove contagious? Will the Gulf Co-operation Council pull together to protect the region’s economy? Should its planned monetary union be set aside as governments focus on protecting their own currency?

Who do we listen to now?

Since everyone else has been trying to copy Dubai, it is unclear how economic policy should be reshaped if the model has to be rescued. Advisers who have been preaching free markets and foreign investment will have a tougher time as economic power shifts back to the more conservative, oil-rich governments such as Abu Dhabi and Saudi Arabia.

Political stability may be affected too. A worsening economy may encourage political reform, on the assumption that people can be more easily bought off in times of plenty. At a recent BBC debate in Doha, Qatar’s capital, on whether Gulf Arabs value profit over people, young Qataris said critics of their countries’ poor treatment of foreign workers should look on the bright side; local citizens benefit from large gifts of land and free university education. Since the oil boom began in 2003, mega-rich Qatar has ramped up public spending by an average of 28% per year; the less well-endowed states have had to make do with annual rises of some 15-20%.

Several GCC economies will go into budget deficits next year for the first time since at least 2002, including Saudi Arabia, whose budget is based on oil at around $50 a barrel but excludes the cost of Saudi Aramco’s massive programme of capacity expansion. Unemployment will rise as thousands more young people, many of them graduates with high expectations, enter the job market. Social unrest is likely to brew. The question is whether governments will meet it with repression or political concessions.

source: economist.com

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Dubai Speculators Quit as Lending Drought Bursts Desert Bubble

By Glen Carey

Dec. 4 (Bloomberg) -- The classified ads in Dubai read like an obituary for a real-estate market that until a few months ago seemed immune from the global credit crisis.

A Turkish investor, who identified himself as Sebat, took out 10 bright yellow ads in the Nov. 25 edition of Gulf News, the United Arab Emirates’ biggest newspaper, with the headline: “DIRECT FROM OWNER DISTRESS SALE!!!” Sebat said he used to be able to buy four or five properties at a time and sell them the next day for a profit of as much as 5 percent.

“There is panic in the market,” said Sebat, 52, who wouldn’t give his full name because he’s juggling 60 properties.

The property bubble in the desert emirate, home to the world’s tallest building, most expensive hotel suite and largest manmade islands, is bursting as scarce credit and slumping oil prices have international investors scurrying to dump assets. 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.

“Dubai is more precarious than it has ever been,” said Christopher Davidson, author of “Dubai: The Vulnerability of Success” (2008, Columbia University Press). “If the property industry collapses in Dubai, it will be finished. Dubai’s relative autonomy will come to an abrupt end.”

The emirate’s push into luxury property developments and tourist attractions was diversification on “paper sand,” said Davidson, a professor of Middle Eastern affairs at Durham University in the U.K.

‘Nasty Downturn’

Real-estate prices may drop 20 percent or more, analysts at EFG-Hermes Holding SAE, the biggest publicly traded investment bank in Egypt, said in a report this week.

Nakheel PJSC, the Dubai state-owned developer of three palm-shaped islands in the Persian Gulf, said Nov. 30 that it is scaling back or delaying work on some of its $30 billion in projects, including the 62-story Trump International Hotel & Tower near the Mega Yacht Club on the trunk of Palm Jumeirah.

“In such a nasty downturn, which we are seeing now, they are just not immune to global events,” said Michael Baer, founder of Dubai-based Baer Capital Partners and great-grandson of Julius Baer, who started Switzerland’s largest independent wealth manager. “Maybe the boom is over for the time being.”

The sheikhdom may need help from Abu Dhabi and the U.A.E. to service its debt, according to Moody’s Investors Service. Dubai borrowed $80 billion to finance its transformation and make up for a lack of natural resources. It has just 4 billion barrels of oil reserves, compared with Abu Dhabi’s 92.2 billion barrels.

‘Healthy Correction’

Dubai officials say the emirate can weather the storm.

“The real estate sector is witnessing a healthy correction,” Mohammed Ali Alabbar, chairman of Emaar Properties PJSC and head of a committee studying the effects of the global credit crisis on Dubai’s economy, said in a Nov. 24 speech. “This is a consequence of global financial conditions and is inherent to the very nature of the market.”

Dubai will meet its debt obligations, he said.

Baer said he is optimistic the boom will return if the government takes the right actions. “There will be layoffs, they will have readjustments in asset prices and maybe they will have more careful accounting practices,” he said.

Led by Sheikh Mohammed bin Rashid al-Maktoum, Dubai attracted investment with no income tax and free-trade zones. Dubai, the second-biggest of the U.A.E.’s seven states, benefited from an inflow of international investors eager to tap the Gulf’s wealth after a six-year surge in oil prices.

Five-Year Boom

Real-estate values surged fourfold over the past five years, fueled by a supply shortage and an influx of expatriates. Rising commodities prices drove inflation, which accelerated to a record 11.1 percent in the U.A.E. last year. Dubai opened its property market to foreign investment in 2002.

Borrowers tapped mortgages for as much as 90 percent of a property’s value to buy homes on the manmade fronds of the Palm Jumeirah and villas with gardens or golf-course views in developments such as Emirates Hills, The Springs and The Lakes.

Now the credit crunch is coming to Dubai. It’s being aggravated by oil prices that have tumbled 68 percent since reaching a record $147.27 a barrel on July 11.

That will mean less interest in buying third or fourth homes in Dubai, said Gabriel Stein, a director at London’s Lombard Street Research, which provides economic analysis.

“There are bound to be white-elephant developments,” he said. “If it was built on the premise of ‘build it and they will come’ then that will now turn out to be a mistake.”

Bargain Villas

Banks are tightening lending or freezing it altogether. Amlak Finance PJSC, one of the U.A.E.’s biggest mortgage lenders, said Nov. 19 that it had suspended new home loans. London-based Lloyds TSB Group Plc stopped offering mortgages for apartments in Dubai on Nov. 11 and reduced the amount it will lend for villas to 50 percent of the price, from 80 percent.

The cost of a seven-bedroom villa on Palm Jumeirah dropped to as low as 19 million dirhams ($5.2 million) last month, from 30 million dirhams in September, according to the Dubai unit of German real-estate company Engel & Voelkers AG.

On Nov. 20, Nakheel and its South African partner threw a $20 million party for the opening of the $1.5 billion Atlantis resort, complete with the world’s biggest fireworks display and celebrities from actress Charlize Theron to singer Kylie Minogue. The hotel’s most expensive suite costs $42,000 a night excluding breakfast.

Two days later, the U.A.E. stepped in to shore up Dubai’s two biggest mortgage lenders, Amlak and Tamweel PJSC. They are merging with state-owned Real Estate Bank, based in Abu Dhabi.

No Longer Immune

Artur Khayrullin moved to Dubai three years ago to escape the Russian winter and invest in the booming real-estate market. Now he’s being forced to sell four apartments to raise cash for his family business in Moscow. They have been on the market for two months.

“With all this oil money in the region, I thought the Dubai property market would be secure from the global problems,” the 30-year-old Bentley owner said, reached on his mobile phone on the beach. Now, “nobody is getting financing.”

The worst may be yet to come as a glut of properties arrives on the market.

About 70,000 units are scheduled to be completed in 2009, more than half of which were originally planned for this year and last, according to a September report from EFG-Hermes.

Buyers willing to commit to purchases before construction are harder to find. So-called off-plan sales helped fuel the bubble with some properties passing through multiple buyers. Off-plan prices have dropped as much as 20 percent since September, according to developer Al Jabal Holdings.

“The speculative buyers were more than 50 percent of the market,” said Eckart Woertz, chief economist at the Dubai- based Gulf Research Center. “They have disappeared.”

Istanbul native Sebat said he’s prepared to leave after 12 years in Dubai.

“I will be in a very big panic and will want to get out of Dubai if I don’t think things will get better,” he said.

To contact the reporter on this story: Glen Carey in Dubai at gcarey8@bloomberg.net.

Last Updated: December 3, 2008 19:27 EST

source: bloomberg.com

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Dubai's building boom ends as economic crisis hits the Middle East

Thomas Atkins, Reuters

Published: Sunday, November 23, 2008

DUBAI (Reuters) - The seaside emirate of Dubai shifted into crisis mode this week as its breakneck building boom stalled, its lending bonanza evaporated and the government pondered wider steps to rescue banks.

Dubai -- self-styled bling capital of the Middle East, nightclub hotspot for the teetotalling Gulf and home to the world's tallest building and biggest mall -- has gone pear-shaped.

"It's gotten pretty ugly out there," analysts at Nomura Investment Banking wrote in a note this week, describing Dubai's property market as "a full-scale frenzy in which speculation went largely unchecked until it was very late."

View Larger Image

An early evening view of the Burj Dubai (top right) and Burj Al Arab (back left) with construction work in the foreground, late November 15, 2008. Dubai property shares plunged, last week, and its biggest private developer slashed jobs as the global financial crisis tightened its grip on the tiny emirate, until now synonymous with the Gulf Arab real estate boom.

REUTERS/Steve Crisp

The result may be a new business model for the emirate, one based less on debt and speculation.

Dubai's response is now being hammered out by a committee of business and government leaders charged with steering the emirate through the crisis and perhaps throwing its high-debt business model out the window.

Big developers have started firing staff and paring projects, banks like Emirates NBD ENBD.DU have blocked consumer credit to employees of companies at risk, and at least one major mortgage company has stopped lending altogether.

"Lenders blinded by rising oil prices and borrowers spellbound by easy returns have helped build a mountain of private sector debt in parts of the region that has generated an illusion of excess and abundance," Nomura said.

Now, investors fear that individuals and corporations alike will have trouble paying back Dubai's non-bank foreign currency debt estimated at just under $70 billion, according to estimates by ratings agency Fitch.

Shares in the region have lost around $1 trillion since the beginning of the year as investors fled. The UAE finance ministry said last month it would inject 70 billion dirhams ($19 billion) into the banking system, and is already looking at doing more to keep interbank liquidity flowing.

Many had hoped that the six countries of the Gulf Cooperation Council (GCC) would escape the crisis due to their massive current account surpluses from energy exports.

"Dubai is the most vulnerable, as it has little oil and has been booming on the oil surpluses from the GCC, Iran and Russia," said analysts at Citibank this week.

DUBAI INC.

Dubai Inc. -- the name applied to the emirate because it is run more as a business than a state -- now faces a major overhaul and has taken on teams of consultants to advise on how it might reshape itself in an era of weaker credit, rising competition, falling speculation and narrower profit margins.

With barely any oil to call its own within the loose UAE confederation, Dubai made its bid for fame by housing banks, retail, media, shipping and logistics enterprises and by billing itself as a safe haven in a volatile region for investors.

Post-crisis, banks and property firms are likely to merge, developers retrench, and the wild culture of speculation grow tame.

"The solution is a comprehensive effort to consolidate the myriad of companies that make up Dubai Inc.," Citibank said.

In addition, some suggest that the monetary regimes in the Gulf -- all, except Kuwait, which peg their currencies to the dollar -- may need to restructure as floating regimes instead, a move likely to spur decades-old goals of monetary union.

Few anticipate default given the widespread view that Dubai is too big to fail and the implicit support provided by its neighbor Abu Dhabi -- home to the largest sovereign wealth fund in the world, ADIA.

"We believe Dubai will pull through with some help," Citibank said.

But with the cost of credit for the Gulf's top 22 financial firms rising from 30 basis points over LIBOR in early 2007 to around 200 now, many expect Dubai's spree to halt, plans to be swept from the drawing board, and existing projects to struggle.

The result, in the end, may be the sustainable growth model that Dubai has sought all along.

source: vancouver sun

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Dubai's building boom ends as economic crisis hits the Middle East

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