Built on shifting sands, the emirate’s property bubble was bound to go pop
One sheikh says to another sheikh: “Dubai? Not any more. We’re selling the lot.” It was always going to happen. The property world’s biggest playground was bound to go pop. The requested debt freeze at the end of last year by Dubai World finally pricked the bubble.
No quantity of fireworks accompanying last week’s official opening of the Burj Dubai – the world’s tallest tower – can disguise the fact that Dubai is the planet’s biggest property disaster, possibly since the fall of Babylon (which, ironically, had once held the tallest tower record).
Dubai’s 828m tower (astutely renamed Burj Khalifa after the ruler of neighbouring Abu Dhabi, which pulled the upstart emirate out of the, er… sand) boasts 900 apartments. It is claimed that all of them have been sold off-plan at $3,500 per sq ft. Presumably, some buyers are hoping to “flip” them on.
If so, they could face an uphill task. Thousands of apartments remain empty or only partially built. Colliers estimates that prices fell by 47% year on year in the third quarter of 2009, before the Dubai World crisis.
Dubai’s building boom had been justified on a fundamentally flawed premise. The emirate’s chamber of commerce forecast that the population would increase by 30% to 1.8m between 2006 and 2010. So, it was reckoned, more apartments would be needed.
These would, in turn, attract additional foreign investment, requiring even more apartments to be built. And so on and so on. This is the scenario for a classic bubble – the tulip mania of 1637 springs to mind.
Burning bankers
“Are bankers going to burn?” The question was posed by Daily Telegraph cartoon financier Alex to a continental colleague, in response to “Burn a banker” protests (15 December). The reply: “Oui, bien sur Berne or Zurich or Geneva”.
This was an incisive comment on the potential impact on property of the UK government’s best efforts to screw up (sorry, improve) the integrity of London as an international financial centre.
A Swiss hedge fund salesman revealed to me recently that a number of clients had been making discreet enquiries about the local property market in his canton. This was several months before Chancellor Alistair Darling announced his pre-election raid on bankers’ bonuses.
Whether or not the measure (an early Christmas present for tax consultants) actually sticks, it does appear that the tide of taxation and regulation has turned. Indeed, the government could be doing for London what the Sarbanes-Oxley corporate governance laws did for New York in the aftermath of the Enron collapse, when many foreign corporations retreated from the Big Apple.
Almost 30% of homes built in London in the first three quarters of 2009 were sold to foreigners, according to a recent conference. However, although the weak pound is clearly attractive to foreign buyers, any tightening of the regulatory or fiscal regime could make would-be purchasers flee to less intrusive domiciles, such as Switzerland.
Freezing builders
If Britain emerges from its mini-Ice Age at the time this issue is published, house builders will breathe a huge sigh of relief.
However, if the big freeze continues, it may disrupt a fragile spring selling season. Several of the bigger groups have been muttering privately that the snow could damage a market described in Persimmon’s new year trading statement as “very challenging”.
Prolonged snowfall at this time of year is bad news for estate agents.
Freezing temperatures and pavements like ice rinks are enough to dissuade all but the most determined house hunters from venturing out. But builders have problems at both ends – production as well as demand. Some have not been able to pour a cubic metre of concrete since 17 December.
Any serious disruption of build programmes could mean that completions – and thus booked sales – could slip into the latter half of 2010. Although arguably a mere issue of timing, one phrase in builders’ trading statements sure to ring alarm bells with analysts is “Results are likely to be more second-half weighted”.
Alastair Stewart is building analyst at Investec Securities
