Endless new real estate projects ought to raise eyebrows!

This month's edition of the international magazine Arabies Trends chronicles the saga of certain buyers from Damac Properties, and a case where the construction of a residential tower promised for handover next spring has not even started.

Investors are up-in-arms, threatening legal action, but their position in Dubai law is fairly tenuous. This highlights the dangers of investing in a market where investment protection legislation is still rudimentary and where the developer is a non-governmental entity, although it has to be said Dubai does have many happy home buyers who have not experienced these problems.

If past emerging market property booms are any guide then the typical pattern is for developers to go on and on promoting new projects until the market can support them no longer. But rather like the English childhood game of musical chairs, the last off-plan investor is the loser.

Last man in

For it stands to reason that it is easier to cancel projects that are hardly started on site than to axe a half-completed residential tower.

So the message to would-be Dubai property investors at this stage of the real estate cycle is to protect oneself by either buying completed property or into a project at an advanced stage of construction or at least from a developer with a good track record.

It may be the case that in an eventual downturn even this prudence will not be enough to protect against some easing of prices. However, the risk will lower than being involved in a legal battle to secure the return of the whole amount invested of which the outcome is uncertain both in time and cash terms.

There is presently no end to the flow of off-plan property investment opportunities in the city. But the business models of some of these developers may not be nearly as strong as the structures they intend to erect.

In particular, funding a project from the flow of payments from the initial off-plan depositors is insufficient, and not every developer is paying due attention to this factor. Moreover, the rising cost of building materials and contractors is squeezing the profit margin available to developers.

Free market economics

This is the classic cycle of any free-market business opportunity. The first-mover makes large profits and attracts a thousand imitators who expand the market and shrink the profit margins to the point that the whole business becomes unviable.

The correct analogy is a stock market trading at the peak of its cycle, attracting large numbers of investors who all think that they can make a profit on share trading as well, despite their lack of knowledge and information. A market correction is what follows.

In fact, emerging market investment cycles are linked, and a real estate correction generally follows 12 to 18 months after the peak of the local stock market, according to AME Info columnist and global authority Dr. Marc Faber.

The Dubai Financial Market peaked just over a year ago. But high levels of local liquidity could sustain a real estate boom for longer than this theory suggests and predicting the precise timing of the end of a boom is a notoriously difficult thing to do.

Indeed, booms usually do not collapse until people have ceased to talk about the possibility of them collapsing, and that has not yet happened. That looks truer of countries like the UK, Ireland and Spain than Dubai, and those may be the markets that correct first.