Dubai: Castles (Literally) Made of Sand

Now that I have had a chance to reflect on what I saw in Dubai on my recent swing through the Middle East, I am still at the same point mentally: in shock. Having read the reports and seen television segments, I thought there was no way I could go there and be overwhelmed. I was wrong. Dead wrong.

In retrospect I should have seen the writing on the wall. Anytime a country or economy sets out to build or create "The World's Biggest" anything--let alone literal castles made of sand--it runs a high risk of ending poorly. I must admit that I went there with the bias that what I would see is one of the biggest property bubbles in the history of the world. That still did not prepare me for the jack-and-the-beanstalk type of construction that was going on there. Driving to my hotel from the airport was as eye-opening as any drive I have ever taken in my life.

One troubling sign was the "Dubai Property Advice" desk sitting in the lobby of my hotel. It was as if people were supposed to say to themselves, "Well, I just came for vacation but we might as well pick up a condo or two while we are here." Once the sun went down it became clear to me that speculation was running rampant in the market. All of the completed buildings surrounding my hotel had floors upon floors of windows without any lights on. This owed to either the fact that rich investors owned these dwellings as vacation homes or developers could not find buyers.

Now I understand that anecdotal evidence a story does not make. Thankfully, stories have been popping up lately to support my mother-of-all-property-bubbles theory. Last month there was the journal blog post (this is an excellent piece if you haven't read it). Before that there was the Collier International report. According to Collier, 140,000 new homes will be built in Dubai by 2010, adding to the stock of 300,000. In addition, a poll of gulf residents which ran alongside the Cityscape convention showed that 75% of respondents thought it was the wrong time to invest in Dubai. Morgan Stanley, to pile it on, has predicted housing prices in Dubai will drop by 10% by 2010; from what I've seen, the people of Dubai should be absolutely thrilled if the decline is only 10%.

Meanwhile, banks are becoming increasingly stringent in their lending, just as they are elsewhere around the globe. Borrowers are no longer qualifying at 10% down with local banks.  Local Lenders such as Tamweel are simply cutting back on the amount of money they are willing to lend individual borrowers. HSBC, the largest of the international mortgage lenders in Dubai, has also cut back on the absolute dollar amount it is willing to lend, while also tightening lending requirements.

According to another report by Collier, Dubai property prices had risen 76% YTD as recently as June.  Too bad for the poor souls who bought in the first half of this year, because buried within that report was a decrease in quarterly property price growth between Q1 and Q2 of 41%! 

Further, any slowdown in property prices could be exacerbated by a breakdown of the economic fundamentals in Dubai. In 2006, the last year figures were available, debt represented 115% of GDP for the Emirate, and it is likely this number has increased substantially since. With oil prices in a freefall, it is becoming harder and harder to see Abu Dhabi and the SWF's of Dubai's sister Emirates providing the type of benefactor relationship that they have in years past. As a result, it is not hard to envision Dubai, with a dearth of natural resources and a highly-leveraged economy, facing a reckoning that could send property prices sharply lower and its economy into a deep freeze.

"And so castles made of sand fall in the sea, eventually"  --Jimi Hendrix

Maybe he meant bankruptsea...