DUBAI'S REAL ESTATE PRIMER

1. (SBU) Summary. A substantial portion of the Dubai real
estate boom (and subsequent bust) was fueled by regional excess
liquidity, negative real interest rates, and speculators and
longer term investors riding the rocketing price wave. However,
the Dubai market differs substantially from the typical U.S.
real estate market, and it is these differences that put the
sector at risk in the current economic environment. The
following is a basic primer in the uniquely Dubai factors (some
of which spread to neighboring Abu Dhabi): the "off-plan" sale,
the high numbers of speculators rapidly flipping units, and
long-term investors eschewing rental income on completed units.
It is these three factors that will most likely exacerbate the
pain felt if and when the Dubai real estate dream bursts. End
Summary.

Buying "off-plan"


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2. (SBU) When Dubai opened property ownership to expatriates in
2002, it was in newly designated "free zones," completely devoid
of existing housing stock. Developers, anxious to cater to the
pent-up expat demand, started offering eager buyers the
opportunity to purchase their apartment or villa "off plan"
(based on architectural drawings and plans for buildings that
had not yet broken ground). These developer-financed contracts
typically required small down-payments, as low as five to ten
percent of the purchase price. As time milestones (and more
recently, construction milestones) pass, buyers are required to
make additional percentage payments on the contract, culminating
with a final payment once the unit is completed and turned over.
While there is some turn-over in completed homes and
apartments, the vast majority of Dubai real estate deals, up
until late 2008, were for developer financed "off-plan" units.
In turn, most of the developers secured funding through project
financing deals at local banks (using the land and other assets
as collateral).

Rise in speculation


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3. (SBU) With the rising price of oil in 2005, loose
international credit policies, and foreign capital inflow
(falsely) anticipating a de-pegging of the dirham, liquidity
flowed into the Gulf and into the various Dubai developers'
projects, pushing prices up at escalating rates. Speculators,
recognizing an opportunity, started buying highly leveraged
property with minimal down-payments, intending to resell the
unit before additional payments were required. For example,
invest 100,000 AED as the 10 percent down-payment on a one
million AED property, and if the price goes up ten percent, to
1.1 million AED before the additional payment was required (a
common occurrence in the 2005 to early 2008 market), a
speculator selling the unit at the new price cleared 100,000 AED
profit on the 100,000 AED investment - not bad for a short-term
investment. During 2006 and 2007, it was not uncommon to hear
of off-plan sales events selling out within one of hour opening
and units being flipped at a substantial profit within the same
day.

Holding onto an investment


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4. (SBU) Not only did speculation hype demand, legitimate
investors also exacerbated the problem by keeping completed
units vacant, neither leasing nor re-selling them. In fact,
overall "new Dubai" occupancy rates mid 2008 were estimated at
65 percent, with some new luxury developments like the 40
building Jumeirah Beach Residence complex only 45 percent
occupied. With double digit annual rent and sales price
inflation, investors were reluctant to lease or sell, afraid
that they might not have yet ridden the market to its peak.
Under Dubai's rent cap law (reftel), yearly maximum rent
increases were limited to five percent per annum in 2008. Once
a unit is leased, the contract remains valid even if the unit is
sold, and it is relatively difficult to legally evict a tenant.
For this reason, occupied/rented units sold at greatly
discounted prices compared to similar vacant units. Some
investors were willing to forego several years' rental income in
anticipation of bigger ultimate returns.



5. (SBU) What remains unclear is who owns the unoccupied units
and why they continue to be held off the market. As detailed
above, some are held by long-term investors following a profit
maximization strategy. Others are held as legitimate second
homes: conveniently located near Iran, Pakistan and other less

DUBAI 00000012 002.2 OF 002


stable countries, common lore is that many of the units are
"bolt-holes", purchased for their accompanying residency visa
and as an asset safe-haven. However, local rumors from well
informed sources have also speculated that up to 70 percent of
these units are held by the Dubai government, Dubai parastatals,
the Al Maktoum family or other influential families/businesses.
The underlying rationale being that the units were initially
held off the market to drive up prices and now are being held
off to keep the market from entering a free fall.

Comment


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6. (SBU) As 2008 came to a close, the market for off-plan,
flipped units evaporated. Speculators are scrambling to make
the next payment installments or, increasingly, simply walking
away (while actual default numbers are not available,
anecdotally a local newspaper recently reported that over 3,000
cars have been abandoned at UAE airports - an indication that
expats, increasingly unable to cope with unemployment and debt
levels, are simply abandoning their financial obligations and
heading home). Whether long-term investors will start
liquidating their investments is still unclear; however, rental
prices are starting to fall, suggesting either excess supply
(investors renting their units), decreased demand (unemployed
expats are departing the UAE) or, as is more likely the case,
both. The medium term implications could be severe, as a
housing glut exacerbated by increasing unemployment and
increasing loan defaults could trigger even further pull back an
economy already at risk. End Comment.



UNRUH
GAVITO