By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
With 60,000 units scheduled to be delivered in 2019 and 2020, home prices in Dubai can well decline by at least 15% to 20% more, as the average home lost 13% of its value in the past year. The decline in rents has accelerated at even a faster rate than the fall in home values, a classic feature of a late cycle property bear market suffering from a supply glut. Even relatively liquid segments of the Dubai property market – for example, one bedroom apartments in Dubai Marina – have plunged from AED2 million ($545,000) in late 2013 to a mere AED1 million ($272,480) now, even as rents fell from AED130,000 ($35,400) to AED75,000 ($20,400) now. This is a catastrophe for homebuyers who have seen their equity wiped out as their brick and mortar nest-egg fell a cumulative 50% in 2013 – 2019, amid one of history’s most spectacular bull markets on Wall Street, a financial fiesta I have chronicled in the MENA/UK financial press since 2009.
I have numerous close friends and relatives who have lost untold millions of dirhams in the vicious property bear market that began in 2014, when the US dollar index was 30% cheaper and Brent crude was $110 even though Daesh terrorists had seized the Iraqi city of Mosul. I struggle to answer the most painful question from homeowners. How could investing in the property market have gone so disastrously wrong?
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One, Dubai home prices were collateral damage in some of the biggest geopolitical and macroeconomic shocks of the past decade. The Russian rouble plunged from 28 to 85 against the US dollar after Vladimir Putin invaded eastern Ukraine and annexed the Crimea. The West imposed financial sanctions on the Kremlin. Russia was a core feeder market for high end Dubai Property in areas like Palm Jumeirah/Downtown but the collapse of the Russian rouble simply made US dollar denominated Dubai property unaffordable, even for the minor oligarchs and investment bankers from Moscow and St. Petersburg I knew who loved to party in Nassimi Beach and then jet off to Courchavelski in the Swiss Alps after Orthodox Christmas in January.
I saw the disappearance of Russian tourists since a friend owns a four star hotel in Bur Dubai whose core market were package tour tourists from provincial Russian cities, from Yaroslav to Novosibirsk to Yekaterinburg in the Urals. His hotel lobby was full of babushkas all set to shop at the Gold Souk and go wadi bashing in the sand dunes. Now the price of a room in a four star Bur Dubai branded hotel can be booked online for 125 dirhams a night with breakfast.
The Brexit referendum of June 2016 was another macro black swan event for Britannia, Cameron/Osborne – and Dubai homebuyers. UK residents were major buyers when sterling traded at 1.60, even 1.70 against the US dollar and the “wealth effect” in London created countless first gen property millionaires. Sadly, sterling collapsed from 1.50 to 1.25 after the referendum, prime London housing was gutted and a crucial feeder market for Dubai vaporized. It did not help that banks like RBS, Lloyds and Barclays exited or dramatically reduced their footprint in the UAE retail banking market.
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Two, the collapse of crude oil prices in 2014-16 was a devastating blow to high end GCC demand for Dubai property. In early 2016, Brent crude traded below $30 and it was no longer a common sight to see Saudi families shopping or dinning in Dubai Mall as in 2013-14. The 2017 Qatar blockade removed another luxury property feeder market segment. Imran Khan and Narendra Modi’s crackdowns against “black money” in India and Pakistan hit the “animal spirits” of the South Asian financial elite for offshore property – and demand for Dubai homes plummeted.
Three, the UAE dirham peg to the US dollar imports deflation into UAE when the dollar rises 30% or more, as in the early 1980’s, late 1990’s and 2008-9. A decade ago, I remember our annual family holidays in France, La Bella Italia and the German/Austrian Alps cost a small fortune since the Euro was 1.50 – 1.60. Now the Euro has plunged to 1.13, the Old World seems dirt cheap but EU property flows into the Gulf have been eviscerated. The US Dollar Index was 76 – 78 in late 2013, when Dubai won its Expo 2020 bid. The US Dollar Index is 97 now – and the GCC economy is mired in a deflation big chill. Since the UAE dirham cannot devalue due to the peg, the burden of adjustment falls on the property and stock market. It is surely, no coincidence that Dubai home prices, the Euro, crude oil and Emaar Properties shares on the DFM all peaked in 2014? Investing in Dubai property without a grasp of global/regional credit cycles is like playing Russian roulette with six bullets in the chamber – a prelude to a messy blowup!
Four, the mortgage cap (75% loan to value for expat mortgages) set by the UAE Central Bank to prevent property speculative manias, reckless bank lending and another 2008 scale meltdown amplified the malaise in the post 2014 Dubai property market. In essence, expat homebuyers had to put up 25% equity plus at least another 8% in Land Department fees, mortgage insurance and other upfront costs if they wanted to buy a home. A 33% deposit to buy a home kills end user demand. It also led to speculative manias in offplan Ponzi schemes, often floated by hard sell, 7% commission incentivized armies of brokers working for dubious developers whose chairmen are either now in jail, hanging out in palatial villas in, say, Pakistan or tanning on the decks of their motor yachts off the Côte d'Azur.
It is surreal that off-plan sales soared to 68% of all sales even as genuine end-users in Dubai were priced out of the market by the mortgage caps and some of the priciest, most exploitative (300 basis points over EIBOR) bank mortgages I have ever seen. What a shame! The victim was the property market.
The moment I scanned the dollar, oil, cross-border bank credit flows, local mortgage rates, GCC economic shocks, Fed policy, the mortgage cap and the supply/demand equations in 2014, I knew we faced another catastrophic bear market in Dubai. So I convinced my principals to sell 200 million AED in primarily Palm Jumeirah/Downtown/Dubai Marina properties at the peak of the market, amid the Expo 2020 hype and Arab Spring safe haven inflows.
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Five, the property bear market is not confined to apartments and villas. Rents in Grade A Jebel Ali warehouses have fallen by 25% from their peaks. School enrollments at high end UK/US curriculum schools have plunged. Occupancy rates in Business Bay are a mere 50%. Investors lured into buying hotel rooms at a promised 10% yield have been skinned alive. Property brokers who get 7% in commissions to con some poor soul out of his or her life savings now work for even the biggest brand name developers. Ethics? An anachronism no broker can afford in a desperately Darwinian quest for survival in the Age of Scamac.
Six, academic research by economists at Harvard and Wharton, vindicated by the strategic buying of Blackstone’s real estate group, demonstrates that secular property markets that coincide with a banking credit crunch bottom at 30% below replacement cost. So I expect we could bottom at 450 -500 AED a square foot in JLT in the next two years. Job losses in banking, construction, aviation, shipping, logistics and services will continue in 2020 while the offplan property madness will add to the supply glut and continue to fleece leveraged lambs to the slaughter. Buyers will get possession of a property four years late that will be worth 50% less in the secondary market. What a pity, what a world!