Identifier
Created
Classification
Origin
05DUBAI126
2005-01-09 13:42:00
UNCLASSIFIED
Consulate Dubai
Cable title:  

DUBAI'S PROPERTY MARKET PART THREE -- BOOM OR BUST?

Tags:  ECON EINV PGOV EFIN TC 
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Diana T Fritz 12/06/2006 06:09:54 PM From DB/Inbox: Search Results

Cable 
Text: 
 
 
UNCLAS DUBAI 00126

SIPDIS
CXABU:
 ACTION: ECON
 INFO: P/M AMB DCM POL

DISSEMINATION: ECON
CHARGE: PROG

VZCZCADO491
PP RUEHAD
DE RUEHDE #0126/01 0091342
ZNR UUUUU ZZH
P 091342Z JAN 05
FM AMCONSUL DUBAI
TO RUEHC/SECSTATE WASHDC PRIORITY 0827
INFO RUEHAD/AMEMBASSY ABU DHABI PRIORITY 0475
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHDE/AMCONSUL DUBAI 3587
RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
UNCLAS SECTION 01 OF 03 DUBAI 000126 

SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV PGOV EFIN TC
SUBJECT: DUBAI'S PROPERTY MARKET PART THREE -- BOOM OR BUST?

REF: A) Dubai 3286 Ref B) Dubai 4371

UNCLAS SECTION 01 OF 03 DUBAI 000126

SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV PGOV EFIN TC
SUBJECT: DUBAI'S PROPERTY MARKET PART THREE -- BOOM OR BUST?

REF: A) Dubai 3286 Ref B) Dubai 4371


1. (SBU) Summary: Dubai's property market has been growing too
big, too fast, according to many observers. Others, concerned
that currently skyrocketing property prices in Dubai are not
good for business, look to the construction surge to assuage
this demand. Since the 2002 advent of property sales to
foreigners, scores of "freehold" high-rises with thousands of
apartments have been put up for sale, often years before they
are even built. Insider estimates put the total number of units
being constructed at roughly 130,000, and estimate total
freehold development announced so far at around USD 50 billion.
While there are solid economic trends propelling this market,
many insiders believe prices will drop; few, however, are
predicting a crash. On average, they estimate a fall of around
20 percent, perhaps two to three years out. This cable, the last
in a three-part series on Dubai's freehold property market,
looks at the size of the construction boom, the factors
propelling it, and the possibility of a slump in prices. Part
One of the series (Ref A) looked at the legal status of freehold
property, while Part Two (Ref B) looked at who was buying it.
End Summary.

Background on Freeholds
--------------


2. (SBU) Until recently (Ref A),real estate in Dubai could be
owned only by UAE and other GCC nationals. The huge foreign
population resident in Dubai (foreign residents are estimated to
constitute more than 90 percent of Dubai's total population of
over one million) had been restricted to renting. (Note: This
practice is common in many countries in the region, where there
is great sensitivity about selling off the patrimony to
outsiders.) In May 2002, the Dubai government gave permission to
three companies to develop and sell "freehold" properties to
foreigners on government-designated pieces of land. The
pro-growth government of cosmopolitan Dubai, recognizing the
potentially huge contribution that foreign ownership could make
to Dubai's development, viewed the move as a very logical, even
essential, next step.

Size of the Boom
--------------


3. (SBU) Other GCC countries have also announced large freehold

property developments to be sold to foreigners, but Dubai's are
on a different scale. The growth in freehold properties in Dubai
has been mammoth by any measure, whether looking at the money
invested in construction, the dollar amount of total sales, or
the number of units being constructed. Aggregate numbers are
hard to come by. Perhaps fearing that investors might be nervous
if they knew the full magnitude of the construction, or possibly
because the pace of new development quickly makes estimates out
of date, neither the developers nor the Dubai government makes
public any Dubai-wide totals. While all such numbers should be
approached with caution, the CEO of a major Dubai developer told
PolEconoff recently that some USD 50 billion in freehold
property construction was either underway or announced.


4. (SBU) A property surveyor estimated that Dubai freehold
announcements so far have totaled about 130,000 units, with only
around 8,000 or so of those finished. Property giant Emaar's USD
10 billion Dubai Marina, well underway, is to have a residential
capacity of 150,000 (roughly 37,000 units, assuming an average
of four family members per unit),and it is sold out. The GM of
a prominent golf course, a UAE national, told PolEconoff that
the government planned to put 186,000 people (approx. 46,000
units) in the huge projects surrounding his course. Illustrative
of the size of the boom (and what most upset this manager) was
the phenomenal growth in the number of golf courses in Dubai --
currently six, but slated to be 20.


5. (SBU) Dubai has grown quickly and so far very successfully
with a "build it and they will come" mentality, and the property
market is no exception. Many people believe, however, that this
time Dubai has gone too far, too fast. Two questions heard
frequently around town are: Will the demand for freehold
property be strong enough to match the huge supply that is
currently in train, justifying the massive investment? And if
the prices do go down, when it will happen and to what extent?

Pro: Solid Reasons Behind Freehold Growth
--------------


6. (SBU) Proponents of Dubai freeholds cite several reasons for
their confidence in Dubai's trajectory. Some of these are
systemic factors not specifically derived from the property
market but boosting it nonetheless. First, Dubai is a
cosmopolitan city and, by most accounts, the most desirable
place to live in the Gulf. The UAE is politically stable, and
its economy, particularly in Dubai, is growing quickly. Dubai's
allure also derives from its tax-free environment. Oil prices
are high and the GCC, particularly since 9/11, prefers to keep
more of its money close to home. As Simon Azzam, CEO of local
property developer Union Properties, recently told the Gulf
News, "Dubai is one of the fastest growing cities in the world."
With an official population of a little over a million, press
reports abound that Dubai expects its population to double by
2010 (around 15 percent growth per year). If that estimate were
to hold true, the number of freehold units mentioned in para
three could actually be insufficient.


7. (SBU) In addition to favorable macroeconomic considerations,
real estate "bulls" in Dubai point to several factors endemic to
Dubai's property market. Current demand is so high that
apartment rents across the city have been increasing
dramatically. Even hotel occupancy rates are at an all-time
high. A.J. Jaganathan, CEO of Dubai developer Emaar, told the
Khaleej Times that, "Dubai has an expatriate population with
(freehold) purchasing capability of about 300,000. Of them,
about 30,000-35,000 (i.e. only some 10 percent) have bought
property so far. At the same time, the population of Dubai in
the income bracket that could buy is growing at about four to
five percent, although the total growth rate is much higher."


8. (SBU) Another reason to believe that property prices are
likely to remain strong despite rising supply is that Dubai has
so far not introduced its new property regulations. The
resultant hazy legal environment of buying a freehold has scared
many potential investors away (Ref A). Once the new laws are
promulgated and working smoothly, these risk-averse expats will
likely be much more willing to buy. Furthermore, without the
proper legal infrastructure, the mortgage market for Dubai's
freeholds is for the most part untapped; as it develops and
expands, customers will be able to buy more easily, and the
freehold market as a whole will become more liquid and mature.

Con: Why Freehold Prices Might Drop
--------------


9. (SBU) Despite all of the solid reasons for the size and pace
of Dubai's freehold frenzy, many observers believe current
prices cannot be sustained. Even Sultan bin Sulayem, Chairman of
Dubai's property giant Emaar, predicted to a local newspaper on
December 8 that Dubai's property market would "cool down."
Sulayem, also a top official in the Dubai government, said,
"...it is not in Dubai's interest to have such high prices for
real estate." The head of a British bank predicted to PolEconoff
recently that "supply will outstrip demand," and the Emirati
head of a local bank, noting that there were "too many
properties under construction" wondered, "Who will live in all
these?"


10. (SBU) People predicting a fall in prices cite several
concerns. Most importantly, they believe that the forces fueling
freehold growth have already been factored (or perhaps
over-factored) into the price. It is this optimism that has
caused so much speculation. Indeed, 70 to 80 percent or more of
freehold sales have been to speculators and to other investors
who will not, ultimately, reside in the properties they have
bought. The Dubai government has recently become more aware of
the danger of such rampant property speculation and introduced
rules -- or pushed developers to introduce rules -- to slow down
this trend. Buyers of units in many of the newest projects have
had to sign a contract that precludes onward sales for a period
of two years. Owners of apartments in the Jumeirah Beach
Residence have been told that the fee to transfer the "title"
(actually just a contractual obligation until they are built and
registered) would be seven percent of the market price of units
currently for sale.


11. (SBU) Pessimists also point out that, as mentioned in para
3, of the 130,000 freehold units to be built, less than 10
percent have been completed. Even in the finished tower blocks
of Dubai Marina, which have all sold out, only about 15 percent
appear to be occupied. As each project is completed, speculators
who have not already unloaded their properties will have to
either find renters, sell, or keep them vacant in hopes of
appreciation. Moreover, Dubai residents who do physically move
into new projects are leaving behind vacant apartments. As this
trend accelerates, it could lead to falling rental prices, which
could in turn drag down purchase prices.


12. (SBU) A final reason sometimes cited for pessimism in the
property market is related to construction quality. Buying based
on a blueprint, and without a chance to "kick the tires,"
purchasers have taken the developers at their word. But many
insiders have expressed grave concern about how well these
places are being built. An article soon to be published by Dow
Jones Newswires, for example, documents the problems in Emaar's
Garden View villas, where residents of 100 villas were recently
moved out of one area because of shoddy construction. (Note:
These residents actually got a windfall, as they were given
nicer and more expensive houses in a nearby development.) An
expat site manager of a construction team told PolEconoff that
he guessed many of these units would last for 10 years, but that
after that many might no longer be livable. The GM of a local
bank, talking about how construction firms had been cutting
corners in the face of the rising cost of materials, said he
could not see offering 20-year mortgages on places that would
likely be falling apart in 10 years. (Note: Fifteen-year
mortgages of 70 percent are quickly becoming the norm.) Dubai's
media, while doing a good job of hyping the property market, has
reported practically no stories about poor building quality;
once this information becomes widely disseminated, some insiders
believe, prices are bound to fall.

Crash or Soft Landing?
--------------


13. (SBU) On average, the property "bears" seem to think that
freehold prices in two or three years will be around 20 percent
less than they are today. The CEO of one large developer told us
that three corrections were coming, the first in the beginning
of 2006 (scheduled completion of Palm Jumeirah) and then two
more corresponding with the completion of other massive
developments. He thought the combined effect would be a drop of
10 to 20 percent, but that the market would not crash -- though
he still predicted that some speculators would be "left holding
the bag." The GM of a local bank predicted, "In four to five
years there will be a crunch," while the head of another bank
thought that "the market will be safe for two to three years,
then there will be a slump." In fact, the market may be already
starting to lose a little steam; while the premiums on
properties (the amount the properties have appreciated since
they were first sold) are still very high, there are some
reports that these premiums have dropped a bit of late (Ref B).

Comment
--------------


14. (SBU) The sheer magnitude of the freehold property
construction boom in Dubai is striking. With investors willing
to keep bankrolling new projects, Dubai has a strong incentive
to come up with new multi-billion dollar developments to offer
them. As strong as the underlying factors propelling this frenzy
of activity are, the possibility of a fall in prices seems real.
The Dubai government appears fully cognizant of the risks of a
property crash and has taken steps to decrease speculation.
Indeed, a controlled slide in property prices and rents could
prove to be better for business than escalating prices have
been. Looking at the larger picture, allowing expatriates to buy
homes will slow down the repatriation of Dubai-created wealth,
enhance Dubai's economic base, and create more "buy in" from
Dubai's expatriates.


DAVIS