US embassy cable - 05DUBAI126

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