Friday Letter Like Texas in the 1970s

Warnings back in 2006 that Dubai was a property disaster story in the making, just like Texas in the 1970s, have proved prescient. But unlike the Lone Star state back then, few expect any quick opportunistic deals to come out of the stricken emirate today.  

News this week that Dubai World is seeking a six-month standstill from creditors on its $60 billion debt pile marks a new low point in a property rollercoaster ride that began eight years ago.

In 2001, the law in Dubai was changed to allow foreign investors to lease real estate for 99 years. Prior to that, only United Arab Emirate and GCC nationals had been permitted to own property in the emirate.

Sensing a missed opportunity, foreign property investors then lobbied the government to persuade it that leaseholds would not be enough to open the floodgates to fresh wells of capital. In 2002, the authorities obliged: Crown Prince Sheikh Mohammed bin Rashid Al Maktoum issued a decree allowing foreigners to buy property in selected areas on a freehold basis. The predictable result was a real estate boom taking off, particularly in the residential property sector.

Playing a central role in that boom was Dubai World, the state-backed company that over the last 48 hours has rocked world markets. The group owns several real estate companies. The most high-profile one, Nakheel, became synonymous with outsized projects such as the man-made island development, The World, which looks like a cell under a microscope when viewed from space. Nakheel owes the most debt out of any of Dubai World’s companies.

The basic problem today is that the property market in Dubai has weakened considerably since the credit crunch. However, way before that, investors were suggesting the place was being over-built.

In January 2006, when PERE reported on Dubai, a principal in Colony Capital’s Middle East office, Naji Boutros, summed up the moment, suggesting it was like Texas in the 1970s. He was of course referring to the notorious real estate boom in the Lone Star state more than 30 years ago, which in the 1980s, when oil prices plunged, led to a swathe of empty skyscrapers and vacant apartment buildings – and subsequent opportunities for real estate investors.

The same could happen in Dubai, Boutros predicted three years ago: the active market of 2006 would end up producing opportunistic deals in the near future because of the “over-supply of space”, a huge proportion of which was being built by “speculators”.

The prediction that Dubai’s boom wouldn’t last has turned out correct. However, unlike Texas in the 1970s, Dubai today doesn’t feel like a place to make a fast buck. There are a number of reasons why Dubai is unlikely to become a playground for opportunity funds any time soon: One, unlike Western markets, it doesn’t have a large number of completed assets that can readily be acquired.

Two, Dubai’s leases are typically short, and the overall softness of the development market – with anecdotes of developers supplementing tenant fit out costs and rent free offers – count against it, too.

Three, much of Dubai’s property has been sold on a strata basis, meaning any acquirer would have to deal with multiple vendors. And four – a point that any would-be vultures should definitely not lose sight of: for all the hype and grave dancing going on right now, there is still a possibility that Nakheel and its parent Dubai World will be stabilised following a wholesale restructuring of Dubai’s finance, in which case there won’t be much need for many assets to be sold.

Make no mistake: Dubai today is in a massive bind. But as far as the emirate’s real estate market is concerned, opportunity funds should not be holding their breaths: fire-sale deals will likely be slow to materialise.