Friday, December 18, 2009

Learning From The Mistakes Of The Dubai Bust

Ronan McMahon discusses the rampant speculation of the Dubai housing bubble that ignored the fundamentals of real estate. Some investors were so caught up in the irrational exuberance that they didn't stop to think about whether people would actually want to rent their properties. See the following post from Pathfinder International for more on this.

I never quite got Dubai. I haven’t been…but I never understood how it could make sense for us real estate investors. I’ve been pitched real estate opportunities in Dubai more times than I care to remember. I never took real estate in Dubai seriously, viewing it as a curiosity. I always sought out the Dubai booths at real estate exhibitions. They were usually entertaining and completely surreal.

Dubai was full of “cool” things…like golf in 120- degree heat, or skiing in a shopping mall. How could we resist? It made sense that Dubai would be Las Vegas, Wall Street and your dream beach resort rolled into one. Didn’t it?

Not once during these pitches did I get a rational case for why I should part with my money. The argument (delivered by a cartoonish used-car salesman character) was always the same. Prices rose by 25% in the last six months, and prices in one project or another were increasing by 15% the next day. Oh…and David Beckham and half the English soccer team have houses here. Of course, this was all made up, and the celebrity names associated with Dubai were paid ambassadors.

There never was a real market…speculators just bought pieces of paper (pre-construction contracts) in the expectation that they could find a bigger fool down the track. 100,000 people from the UK and Ireland alone bought real estate here. Where were all the people who would live in these shiny new condos going to come from? The frenzied crowds of buyers, however, never stopped to ask. They were blinded by greed.

Now, according to The London Times, close on 400 building projects with an expected development value of more than $300bn have stalled. They report that property prices have tumbled by around 60%. A price fall of 60% understates what I hear from contacts. I’ve heard anecdotes of people selling for as little as 20% of the original price of their property. There is no market, so to sell a property you almost have to give it away.

Expats are driving to the airport, abandoning their cars, and getting on the first plane out of the country. Many have lost their jobs…selling shiny new condos, or selling cocktails and champagne to the condo salesmen. In Dubai, if your rent check bounces, you will be locked up in jail. Missing a rent, mortgage or other payment is serious business here. So many are simply leaving Dubai.

Dubai is now in default. Despite repeated assurances that everything was ok, Dubai has now said that they need more time to pay back the folks who have lent then money. Truth is this doesn’t matter a hoot for the real estate market there. It’s been dead and gone for the past 18 months. This will just be the final nail in the coffin.

The lesson we need to take from all this is a timely reminder that we always need to understand who the end user for a piece of real estate will be. If you are buying pre-construction, who will rent or buy your unit from you on completion? How much competition will you have with other vendors or landlords? How will demand measure up with supply?

In the case of Dubai, the question was whether they could build a major financial and tourism/second home destination from the sands of this tiny emirate. I never understood why someone would want to spend time there. There are much nicer places to golf, ski, lie on the beach or go shopping. Dubai just never made sense to me.

Those who applied these most basic of rules could see that there never was a market for all these shiny new condos…that there was never a true real estate market. There was only the hope of finding a bigger fool. Now even that is gone.

This post has been republished from Pathfinder International, an international real estate analysis site.

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