03 January, 2007

Wall Street Journal: Massive Projects Attempt To Lure Business, Tourists; Can Demand Meet Supply?

Link ($):
"It boggles the mind how many Lagoons-style projects are under way in Dubai," says Bill Kistler, president of Urban Land Institute in Europe, a nonprofit real-estate research institute based in Washington, D.C. "Dubai wants to become the Singapore of the region and they're well on the way to doing that."

Other projects include Dubai Waterfront, a beachfront project larger than Manhattan being developed by local developer Nakheel LLC which is partially state-owned. Nearby is Dubailand, a three billion square-foot entertainment and leisure project being managed by the government's Dubai Development & Investment Authority. Many of the attractions are expected to open in 2008.

Instability elsewhere in the Middle East has helped attract businesses and tourists to Dubai, says Mr. Kistler. If the Middle East stabilizes, Dubai could lose business to other fast-growing emirates, such as Abu Dhabi, he says. The United Arab Emirates has grown to become a significant international business center in recent years due to its reputation for being one of the most successful and stable nations in the Arab world, as well as one of the most liberal. (Each emirate is controlled by a ruling family.) However, says Mr. Kistler, "whether there is an appetite to fill all of these new offices and apartments remains to be proved."

"You have to look at Dubai with different optics because of the sheer scale of development. They're building for the next generation," says Urban Land Institute's Mr. Kistler. "I went to visit one Dubai developer recently and it was like a Harrods' sale, there were so many people. I thought perhaps that a tour bus had just come in, but apparently this was just a typical day in their sales office."
The Emirates Economist has more on Dubai from Mr. Kistler.

UPDATE - A project that "represents the desire of General Sheikh Mohammed Bin Rashid Al Maktoum, Prince of Dubai." This Hydropolis project has been long dead hasn't it?

18 comments:

nzm said...

Thanks for that glowing and positive endorsement, Mr Kistler, the donation cheque for your non-profit organisation is in the mail. :-)

Now everyone jump over to John's blog to see what else Mr Kistler said earlier this year!

BD said...

I wonder how up-to-date this report about Hydropois is. I heard a long while back that the project was relocated and later cancelled. On the other article linked to Mr. Kistler's "don't invest in Dubai," it comes across as very one-sided and based on old and specualtive data.

He says in 2004 50% of off-plan developments were bought up by speculators. Well, in the Dubai property market 2004 was a long time ago and the role of speculators in the market is way down from what it used to be. He complains about Palm Jumeirah having only one way in and out and sounds alarms over what might happen in an emergency.

He doesn't mention that there will be a monorail link to a metro, nor that the one-way in/out access is a 10-lane highway nor that over-congested SZR which it links to will soon become a toll-way, thus reducing congestion, etc. And what kind emergency is he warning about--that the whole island will suddenly sink with no one being able to escape? The article is way to one-sided and the writer selects often out-dated or wildly speculative data to back up his premise.

BD said...

Wikipedia on Hydropolis says this:

The Hydropolis was a self-acclaimed 10-star, underwater hotel which was under construction in Dubai. However, as of November 2006, Hydropolis' launch has been cancelled, due to cost issues and concerns over the project's impact on marine life. Atlantis hotel, however, is being built and will open on the Palm Jumeirah Dubai in 2008. Only part submerged, it is primarily a 'marine experience' based on the myth of Atlantis. The several marine environments will include the Ambassador Lagoon, a several million gallon marine habitat which will be home to approximately 65,000 fish and ocean-dwelling animals.

Anonymous said...

hmm the wsj.com link requires login... got a mirror ?

Anonymous said...

For those who are unable to read the WSJ article

In Dubai, Developers Think Big, Bet Even Larger—Massive Projects Attempt To Lure Business, Tourists; Can Demand Meet Supply?

The Wall Street Journal
Sara Seddon Kilbinger
December 27, 2006

Its inhabitants tout it as the land of eternal sunshine and endless shopping, but these days Dubai is becoming as famous for its vast developments.

One ambitious example is The Lagoons, a $17.7 billion, 70 million square-foot mixed-use project being developed just south of Dubai Creek, about six miles from Dubai International Airport.

The development will comprise seven interconnected islands, housing a mix of offices, hotels, more than 50 shopping malls, health spas, parks and conservation areas. Also on tap is Dubai's first opera house, encompassing a planetarium, art center and theater. When completed at the end of 2010, an estimated 140,000 people will live at The Lagoons, plus an additional 120,000 will work there, according to Farhan Faraidooni, chief executive of developer Sama Dubai.

Sama Dubai, the real-estate investment and development arm of state holding firm Dubai Holding, is developing the Lagoons with a number of third-party investors, including Dubai's National Bonds Corp. a private shareholding company owned by Dubai Bank, Dubai Holding and Emaar Properties. Sama says it isn't allowed to divulge the name of any other third-party investors.

"It boggles the mind how many Lagoons-style projects are under way in Dubai," says Bill Kistler, president of Urban Land Institute in Europe, a nonprofit real-estate research institute based in Washington, D.C. "Dubai wants to become the Singapore of the region and they're well on the way to doing that."

Other projects include Dubai Waterfront, a beachfront project larger than Manhattan being developed by local developer Nakheel LLC which is partially state-owned. Nearby is Dubailand, a three billion square-foot entertainment and leisure project being managed by the government's Dubai Development & Investment Authority. Many of the attractions are expected to open in 2008.

Instability elsewhere in the Middle East has helped attract businesses and tourists to Dubai, says Mr. Kistler. If the Middle East stabilizes, Dubai could lose business to other fast-growing emirates, such as Abu Dhabi, he says.

The United Arab Emirates has grown to become a significant international business center in recent years due to its reputation for being one of the most successful and stable nations in the Arab world, as well as one of the most liberal. (Each emirate is controlled by a ruling family.) However, says Mr. Kistler, "whether there is an appetite to fill all of these new offices and apartments remains to be proved."

But for now, developers in Dubai are prepared to think big and bet even larger. About 20% of the allocated lands for sale in The Lagoons sold out within two weeks of going on the market, according to Sama Dubai. Such speedy sales indicate a growing market for such developments, says Mohammad Faheem, a research analyst at real-estate advisory firm CB Richard Ellis in Dubai.

Tourism figures also suggest that Dubai is becoming an increasingly popular destination due to its year-round good climate. Dubai hotel guests are expected to total 6.3 million this year, up from 6.1 million last year, according to the Dubai government's Department of Tourism and Commerce Marketing.

A wide range of buyers are looking at homes there, including Europeans, Saudi Arabians and Indians. "We are hoping to attract all the nationalities that traditionally find Dubai appealing as a destination—Westerners, Arabs and Asians—as well as helping the ongoing broadening of the nationalities that visit Dubai, as has been the trend in the past few years," says Mr. Faraidooni, Sama Dubai's CEO. Developers are also targeting Arab-Americans based in the U.S. who may be interested in buying second homes in Dubai.

"You have to look at Dubai with different optics because of the sheer scale of development. They're building for the next generation," says Urban Land Institute's Mr. Kistler. "I went to visit one Dubai developer recently and it was like a Harrods' sale, there were so many people. I thought perhaps that a tour bus had just come in, but apparently this was just a typical day in their sales office."

nzm said...

BD: it wasn't Kistler who said don't invest in Dubai.

The 10 lane highway off The Palm becomes a 4-lane highway when it reaches the feeders for Al Sufouh and SZR - that's where the bottlenecks will occur.

And if you think that the impact of speculators buying off the plan in 2004 is a thing of the past, I don't believe that the shockwaves have started yet, as the properties which were bought in 2004 are either just coming on the market (if they haven't been delayed) or they haven't yet been completed.

The whole paragraph in the article reads: Late in 2004, Middle East Business media reported that 85% of off-plan flats and 50% of off-plan villas were bought by speculators, most of whom sell before completion. This means that most homes are secured by “10% deposits and then traded like shares”, says Graham Norwood in The Observer. In other words, the majority of those buying have no intention of living there.

(The bold type is my emphasis.)

So the speculators make their money by purchasing and reselling properties off the plans before project completion - most probably before the land has even started to be prepared for construction.

All they've done is put down 10% deposit on the properties and then onsold the property titles to other people/companies - receiving a a higher percentage return than the 10% downpayment they made to secure the properties. They get their money, make their profit, and they get out of Dubai.

They've now onsold hundreds, if not thousands, of properties to the next man in line, who now has to do the same. Thing is, in the end, they start to run out of companies who will take bulk (multiple) properties off their hands, and are now forced to sell them individually.

As well, the property developers are now starting to demand further installment payments - putting further pressure on these guys to offload their assets which are now turning into liabilities because of the higher costs of reselling them individually, slower turnover, increasing costs associated with them and stalled cashflow.

Non-payment of installment payments means that the property developer is now in danger of running out of money to complete the project, or they face delays in construction due to lack of money.

If the original property developer is wealthy enough, they may "buy back" some of the properties to prevent a collapse of their projects, but this puts further financial pressure on these companies to complete their projects to budget and make profits.

This drives up the sale price to the real end-user - i.e. the guy who genuinely wants to live in Dubai - to the point where not many average people can afford to buy property.

I believe that we're starting to see the result of this now. Dubai Marina 1 apartments for between 3 and 14 million dirhams in the Better Homes catalogs and 5-6 million dirhams for properties in the Arabian Ranches. How many people out there are millionaires who can buy these places and want to live in Dubai?! Most people coming here to live and work can't afford to buy million euro/pound/dollar properties in their home countries!

There will be a few people out there who are sweating at the moment - and not because of the UAE weather!

The major advantage that Emaar and Nakheel have is that they have a benevolent government who cannot afford to see them fail.

For those of you who want some balanced info on the Dubai property market, read Property News Dubai. I've been following a lot of the writer's predictions and analysis, and he/she has been on the money on a lot of occasions.

Balushi said...

why do u all write so much? I mean no one even reads the Instructions for installing a windows problem!!!! - u think anyone will read all this long comments???



not that, even Rules and regulations no one read them.



I wud want to say more but then no one will read this. KISS!- KEEP IT SHORT AND SIMPLE.

BD said...

I read it--thanks NZM. To Balushi--it's not all that long, just looks that way since its squeezed into a narrow column.

Back to NZM, I can appreciate your analysis, but I still wonder whether the impact of those early speculators is all that great now. That is, the early run of say 20,000 properties have been long since more than dwarfed by the more than 100,000 properties since released to the market. Prices did rise in the early days 30-50% per year, but in the past couple years or so that has come down to 10-20%, and the trend downwards continues. Furthermore, the second and third tier buyers probably have better means or will to keep up with payments than the early buyers. The role of the specualator has been decreasing, in that second and third tier buyers either need a place to occupy now--thus they buy at a premium rather than a lower priced product direct from the developer--or they are prepared to hold onto the property longer before selling.

IMO, the fact that rental demand is still high, and due to the inevitialbe days in project completion, the demand/supply threshold would be met until early 2009 (my guess). Until then property laws and regulations continue to improve and the key point is that Dubai's market base it so diverse--that is it is attractive to others in the middle east when things on the home turf are unsettled (Iran, the Levant, etc.) Western Europeans will continue to come for sun and tax savings, especially as better regualtions come into place, the oil rich in Russia and central Asian regions will come, and as both India and China's economies continue to grow the wealthy will begin to pour in. Even without the Americans and despite the lure of projects in other places--Abu Dhabi, Doha, etc.--I think Dubai is still way ahead in the name game. In addition, I don't think people will run scared with their investments in case of a major terrorist attack--as some people like to presume. The isolated terrorist attack has become so widespread that there are few places to run back to that aren't vulnerable themselves. I think growth in Dubai is here to stay and Dubai is especially resillient when trouble plagues the rest of the Middle East, if it in fact doesn't benifit from such instability.

You refer to the high prices, which I agree make it difficult to impossible for 80% of the population here to buy. But, financing options will improve and price rises have already more or less stabalized. True, the investor looking for quick profits will (and has already) lost interest. Those types are not good to have anyway. For medium and longer term investors 5-10% growth in property values with an improved regulatory climate is enough to maintain their interest.

nzm said...

BD: what you say is fine if you are presuming that the first and second tier buyers have managed to offload all the properties to the end-users.

If they haven't, and they get stuck with a whole lot of properties on their hands and unable to pay for them, that's when the s**t will hit the fan.

The developers of the Jumeirah Beach Residences claimed that the apartments were 73% sold off the plans before construction even started, and then they build a 30million dirham sales office to sell off the other 27%?

The Dubai Marina 1 complex still sits at about 50% occupation - take a look at the towers at night for the lights, or walk through the carparks to see the number of empty spaces.

The demand is not for the luxury towers - it's for the next level down - the likes of the Greens, JA Gardens and Discovery Gardens when the latter is completed.

John: in answer to your update, yes, I believe that Hydropolis has been scuttled. Not because of "concern to the marine environment" as they claim, but most probably because the water in the Gulf is too shallow for the construction and too murky. Any diver in the gulf will be able to confirm that.

Balushi: I hope that this was short enough to retain your attention! :-)

BD said...

What you say about occupancy, NZM, is interesting. One can only speculate, I suppose, on what the real state of sale and occupancy is short of scientific surveys or developer revelations. Anecdotally I do come across sales ads for DM 1 units, but it seems to be of small enough number to account for normal migration patterns. What's needed among other things is a governmental planning agency to scietifically investigate and publish about such issues.

It seems Emaar, as perhaps the largest entity in terms of actual product delivery, is holding on to some of its properties not releasing them for sale until end of construction. This is of course idicative of their size and ability to build without depending on cash flow from sales, but it also suggests that they want to benifit from anticipated property price increases instead of letting other investors get it all. Overall I think it is still a healthy market with good prospects, but there are risk factors. DAMAC, for example, with some 60 property announcents and launches worldwide (some massive multi-tower projects) is indicative of developer over-reaching. If people are prudent to avoid such obvious but nonnetheless alluring schemesters, I think they will do OK.

dredge said...

this is one of the more informative discussions I've seen on this blog for a long while!

John B. Chilton said...

It's amusing how long the Hydropolis story has stayed afloat:

Jan 3, 2007 - Gizmodo

Dec 26, 2006 - Coolest Gadgets

Dec 18, 2006 - Gadgetell

Dec 13, 2006 - Popular Science

Of course many of these stories use images (and words?) from a September 2005 article abbreviated here.

I enjoyed The Noisy American's take on the representation of the desire.

Back nearly a year ago I wondered about the murkiness surrounding this project, figuratively and literally. The comments received were incisive.

And the second half of this other Emirates Economist post tells of another Dubai underwater hotel that went belly up - Poseidon Resort.

Ali Hassan said...

BD and NZM....what an excellent discussion! I truly enjoyed it.

From the differing views presented, I’d hazard a guess that BD has bought an apartment and NZM hasn't....hence BD's optimism and NZM's realism!! BD, from your blog, I believe you've bought in MAG Tower, which is developed by Moaffaq Al Qaddah whose main business is vehicle spare parts.

Seems to me there is a large percentage of buyers out there who have bought property with the intention of either selling them to end-users or renting them to residents. As NZM rightly said, who are the buyers/renters? The kind of rents being bandied around for these apartments (Dhs.80K for a 1-Bedroom flat?) would make these dwellings affordable to those who earn at least AED 20,000 per month. Would I be wrong to say about 50,000 to 60,000 people in Dubai at present earn this kind of money? There are easily this many apartments in Dubai right now, so where would the demand come for renting the reportedly 75,000 apartments that will be ready by year-end?

It also seems to me that many of the developers (including Emaar and Nakheel) are intentionally delaying completion and release of their developments to avoid a market crash. To wit….the flats in Jumeirah Beach Residences which were due to be handed over end-2006 have now been delayed for several more months. Only a small percentage of developments have actually been handed over…..it stands to reason that once more and more buildings get completed and occupied, supply will outstrip demand and rents will fall.

One aspect of Dubai’s property market that astounds me is the fact that a lot of buyers have willingly paid anywhere from 40% to 75% of the cost of the apartment upfront, long before construction has even started. Why? I know for certain that in the US and Canada when one goes to buy a new property, you need to place a small deposit (on a $450,000 detached house, the deposit is about $35,000 which is less than 10%), and the balance is paid upon completion and handing over of the property.

Seems to me the developers have not put in any serious capital of their own, but instead have used the funds of the buyers to construct the buildings. So the developers have ended up in a win-win situation, while a number of buyers are right now in a lose-lose situation. To my mind, those buyers who have paid 50% to 75% of the cost of the property are the suckers who have been coaxed to part with their money in return for fancy plans and (if they are lucky) a hole in the ground.

Folks in Dubai are now openly talking about a property market correction in much the same way that they talked about a correction of the Dubai Stock Market in 2006. If the aftermath of the DSM “correction” is anything to go by, heaven help property owners should the same kind of “correction” occur in the property market.

nzm said...

BD: most of the apartments in DM1 being offered for sale are being sold by end-users wanting to get out of them.

If normal migration patterns means leaving the UAE after having owned a property for only 3 years, then why bother to buy - particularly when DM1 was finished before the foreign ownership and residency laws were announced by Sh. Mohammed?

I think that in most cases it's disillusionment with living in Dubai or people having trouble keeping up their repayments that's making people sell.

Our landlord was one of them - he sold and went back to Greece. When he put the apartment on the market, he was told by Emaar/Better Homes that he could expect 2.6 million dirhams for it - a 100% ROI. We believe that it sold, but we don't know for how much or who to, but for a 2 bedroom apartment, that's a ridiculous price!

If Emaar is holding back properties, they play a dangerous game where the tipping point lies between creating a trickle supply and meeting the demand for properties, and then to meet the demand, they over-inflate the prices for available apartments and those they're holding back.

There has been some discussion that the high rental rates are being introduced in an effort to "force" people into buying, but if the cost of purchase is also out of reach, that won't be happening either.

Regardless of the low interest loan rates, people have still got to be in a position to pay back the loans.

Please someone correct me if I'm wrong with this: I believe that the interest situation (or variation of interest!) in the UAE is different to other places - the annual interest is calculated on the total amount borrowed, and the annual interest payment stays the same for the duration of the loan period. I.e. if you borrow 200,000 dir over 20 years and pay 20,000 in interest for the first year, you pay 20,000 interest for each of the remaining 19 years as well as pay off the 200,000 loan. The amount of interest paid does not decrease in relation to the decreasing loan amount left to pay each year. That's how it was for our car loan.

People who are not familiar with sharia banking need to be aware of that - it's not the same as in other countries!

It's not just Damaac going offshore, Emaar is too. Check out their International page to see the 10 other countries where they have interests. I believe that they're doing this to diversify and find other avenues in which to generate money to pump into their UAE dealings.

In a nutshell, the UAE government cannot allow Emaar to fail. They are the mainstay of the property development arena, and also the kingpin of the Dubai Stock Market, together with their loan company Amlak. (How Emaar got to float Amlak as a separate company on the DSM is a mystery to me!) If Emaar crashes, they effectively wipe out 2 important areas for the UAE upon which the government is basing a lot of the emirate's future.

Ali: thanks for joining in - it's always great to have spirited discussion between interested parties - I learn so much from them!

I'm glad that you called me a realist and not an optimist, and yes, you guessed correctly, BD has bought an apartment and I haven't!

We've considered buying, but truthfully until we see some sense come into the market, plus the residency issues for foreigners set in legislation, we're not prepared to do so.

The property market in Dubai is akin to swimming with piranhas!

If a correction in the property market occurs in Dubai, there'll be a lot more people hurt by it than the stock market adjustment. People will be losing more than their shirts (kandooras?!) over it!

Ali Hassan said...

NZM….you’ve made some interesting observations in your last post. To answer your question on interest rates in Dubai, you’ve got to be aware of one aspect in the way financial institutions (FIs) charge interest in Dubai, both for mortgages and car loans. If the advertised interest rate is low (say 4% to 5%), then most certainly the FI is calculating interest at a flat rate (in exactly the same way you’ve described in your post). If the advertised interest rate is around 8% or so, then the FI is calculating interest on a declining balance.

Irrespective of the way FIs charge interest in Dubai, I cannot agree with BD that mortgage rates are low in Dubai. Last year when I went to Canada to renew the mortgage on my house there, my bank and I agreed to a 5-year fixed rate of 4.75% on declining basis (of course)……by fixed rate I mean that the rate will not fluctuate irrespective of any changes in the Libor or Prime rates. And this was not a special rate that I got, but rather the normal rates charged to all borrowers with good credit. So the 8% to 9% rate charged by FIs in Dubai are much higher than those in mature economies.

DAMAC is an interesting case study of over-reaching ambitions. Not content with their developments in Dubai, they launched ambitious plans for buildings in Beirut. If any of these plans were implemented, I can only surmise that DAMAC is in financial difficulties since their Beirut investments could very well be a pile of rubble right now. No wonders, then, that their flagship development in Dubai “Lake Terrace” is many, many months late in handing over. Apparently, midway through construction the main contractor refused to continue work….perhaps because DAMAC couldn’t pay them due to financial difficulties??

Whether Emaar and Nakheel going overseas to “diversify and find other avenues in which to generate money to pump into their UAE dealings” proves to be a successful strategy is highly debatable. While operating in Dubai, both companies enjoyed a very cozy and oligopolistic business environment, with huge government support and clout. So if you bought a property from Emaar or Nakheel and handover was delayed by a year or two….well, tough titty, you’ve got to live with it. Compensation for delayed handover?? Don’t make me laugh!! Finishing not up to your expectations?? Live with it, brother!!

Not so when they go into the international arena…..now they will have to operate in a highly competitive environment with no clout, but rather with threats of lawsuits hanging over them if handover is delayed or finishing is not up to standard.

NZM……I believe you are following a prudent strategy in owning property in Dubai. And you are right, a lot of people will lose their shirt if the property market collapses. However, unfortunately these “kandoora” types will not be the ones to suffer most……they’ve either exited the market a long time ago, or they will go running to Sheikh Mo for compensation. It’s the poor sods who have put in their hard-earned money into a big, fat hole in the ground for whom my heart bleeds.

nzm said...

Ali: thanks for the info on the interest rates - I had no idea that it was different once the rate got higher.

So there would be a lot of people perhaps being taken in by the advertised so-called low interest rates being offered here, only to find that they aren't so low after all once all that interest has been paid!

Your other comments are also interesting re Damac et al competing in the international arena.

I predict interesting times ahead!

Anonymous said...

for once, a real conversation going on here. Funny why the newspapers in UAE never talk about this stuff. :/

BD said...

Before this post disappears let me put up a link where we can continue the discussion: Skyscrapercity.com's Dubai Inverstements thread.

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