• Embed Doc
  • Copy Link
  • Readcast
  • Collections
  • CommentGo Back
Download
 
Having earlier worked in Corporate Banking in Pakistan, I have lot of colleaguesthat have moved to greener pastures mainly to Arabian Gulf cities such as Dubai,Doha, Riyadh, Abu Dhabi, Bahrain etc. Whenever we call each other, the topicdrifts to job security and the economic health of Dubai and the wider gulfregion. The questions that I get asked the most are about future of Dubai andwider gulf region.Though I have a flair for economics but I am not an economist. I am asked thesequestions as I boast an active network of finance professionals and wide reading_when the employer is paying me for sitting idle and doing occasional paperwork_the only thing left to do in office is to browse websites and engage in networking(calling up old colleagues in financial sector and government economic departmentsfor a chat).Let me focus in this article on Dubai because it causes the most heartburn. Thosewho have a stake in Dubai, employment and/or an apartment are the mostargumentative. They want reassurance that one day soon things will be same asbefore with the exception of high rents. The amazing thing is that nobody in Dubaicomplained about overexposure when the world was touting Dubai as a success storyand other gulf nations like Qatar were trying to replicate its success. Now ifsomeone points out a negative aspect of Dubai, he is labeled as engaging in "DubaiBashing". Recently Johann Hari wrote a very damning piece on Dubai (pronounced as"Do Buy" according to him) in The Independent which one may call Dubai bashingfocusing more on social and environmental aspect. However, I will talk fromeconomics and finance perspective.For the lack of better word, “anchor” describes a certain critical mass usuallylocal population that will stick around for the real estate and continue thedemand. Take Karachi for example. During the heydays of stock market boom inMusharraf era, large number of people was investing in property. Though there werespeculators, however, actual homeowners outnumbered them by a large margin. Sowhen the boom ended, the prices went down but only little as large number ofserious home owners were waiting on the sidelines to buy the property wheneverprices become reasonable. These people act as anchors for prices and demand forproperty.Local population of Dubai is only 10%. The problem with Dubai was that it wasmarketed as real estate heaven but no corresponding anchors were targeted to bringstability to the market. The new developments are to be marketed to foreignersfrom western countries that had nothing to hold them to the country. Thegovernment just tended to focus on eye catching headline making high enddevelopments. The only people who could afford those developments were the jet-setters who live around the world without anchoring themselves in any one region.Finding an opportunity, these jet-setters engaged in speculation in Dubai,flipping properties and quickly pocketing profits. A whole class of businessdeveloped around these people of real estate agents who made a lot of money incommissions for transferring properties (reminds me of DHA in Karachi in 2005 to2007).The middle class expatriates also wanted to enter into the game but with theprevailing prices could not afford those apartments. However, influx of peopleinto Dubai and limited living spaces available meant that rents sky rocketed evenin adjacent areas like Sharjah where earlier people working in Dubai used todomicile themselves due to lower rent. With rentals consuming around half ofmonthly income, buying a highly priced item did not seem an unreasonable idea whenthe mortgage amount is slightly higher than rental payment while at the same timeyour ownership of an asset increases. Another set of developers started enteringthe market targeting the middle class with slightly lower class apartment
 
projects. A new mortgage finance industry developed around facilitating middleclass. The mortgage payments would only start after getting possession of theapartment so that it turned out a substitute for rent. The middle class went forit. With only 10% down payment required and development period of 3 years, itmeant that no payments for first 3 years. Hence, middle class also entered thegame of flipping apartments. The prices started to sky rocket in middle classapartments as well.The flipping of property gives the illusion of demand. With both upper class andmiddle class flipping properties, the demand of property appeared to multiplysignificantly in short period of time bringing in whole new projects to cater tothis artificial demand along with associated work force and businesses to supportthis artificial demand.Then the property bubble burst. The Russian mafia and the speculators that wereflipping the high end apartments left the city. There is only so much upper classyou can have in the city but the flipping gave the false impression of Dubai beingthe haven of ultra rich. With the speculators gone, the upper class apartmentsbecame empty, other upper class developments had to be stopped midway and somewere canceled altogether. The whole real estate agents industry with their LandRovers and beautiful offices became redundant and left the country. By oneestimate there are 3000 cars left at Terminal 1 of Dubai Airport (a fact denied byDubai government but anyone living in Dubai can easily verify it).If the trickle down effect is still not clear, it means that real estate agentswere laid off, they stopped payments on their own cars and apartments, which meanspeople working in car financing and mortgage financing in banks were laid off,which led to a large drop in car sales and new construction work, which led toredundancy in construction industry of high end apartments. This led to drop inhigh end apartment prices translating into a drop in medium end apartments. Andthe same cycle was repeated. Construction industry had become the largest employerin Dubai and as such, now became the largest employment terminators.With the residency laws as they are in Dubai, a lot of people had to leave within3 months of termination. Moreover, expatriate in neighboring countries had alsobought a lot of property in Dubai under false marketing campaign that ownershipwill grant them permanent residence in Dubai. The government recently clarifiedthat this is not the case and as such a lot of people who had bought or thinkingof buying property in Dubai for this reason were turned off. Moreover, Dubaigovernment has recently introduced new property law which favors the developerthus putting the property buyer at a further disadvantage.Now the middle class because of the new laws wants to get rid of the property. Alot of people I have talked to want the projects canceled altogether so that theycan get their down payment back or don't have to pay the exorbitant mortgage as itdoes not make sense anymore since the rents have come down significantly.The business model of Dubai of targeting rich whites has gone bust. The propertybubble has burst and is taking down Dubai with it. However, during this shorttime, Dubai has built excellent infrastructure, roads, metro, airport etc and area decade ahead of the neighboring countries. If maintained properly, thisinfrastructure will remain and still give Dubai an advantage over neighboringdestinations. But they can use the current infrastructure as a launching pad for adifferent business model.There is a caveat, however. Spending on infrastructure is done through cost-benefit analysis. Though countries world over occasionally spend huge sums inbeautiful bridges and roads and metros but there is an analysis of the benefits(financial as well as spillovers into social, economic areas) as well as costs of
of 00

Leave a Comment

You must be to leave a comment.
Submit
Characters: ...
You must be to leave a comment.
Submit
Characters: ...