Sunday, July 20, 2008

Dubai Real Estate- On The Ground Floor

There is only one industry in the world in which everyone is an investment expert; It’s called Real Estate!!

As the loser that I am, I decided to spend two hours last night going to every single real estate stand in the Mall of the Emirates. Why? Well, frankly I was curious to hear what these “sellers” where all about, and exactly what pitch they were all using to move their properties. Boy did I have some fun. The first stand I visited featured an attractive English lady selling a project tin Dubai waterfront. Her schpeel went a little something like this…”Dubai is the new Hong Kong, there is limited waterfront property, everybody wants this property, only a fool would not buy this project, the price can only go up.” Whoa…the price can only go up?

“Why” I asked.

Well, according to this investment expert,” Property prices always rise and they never fall because land only appreciates in value”.

Hmm, “Are you sure about that statement?” “Yes, of course I am!” she replied.

Honestly, where do they find these people? When I cited the falling property prices in the rest of the world as examples of instances in which property prices fall, she responded with “Dubai is different”. Ahh…these guys will never learn will they. Anyway, I could go on for hours about conversations with real estate agents who want to argue that land only goes up in value, but I am sure nobody cares. There is really nothing surprising about this.

What I do want to talk about is how aggressive these developers are getting, and how deceptive they can be with their practices. One developer told me yesterday that if I gave him 20 million dirhams he could guarantee me 30% return. In fact, he would hand over a post dated check for 26 million which I would be able to cash in 6 months. According to him, “It’s risk free”. It’s amazing how most of these guys behave more like con artists than anything else. How can you literally market yourself as someone who can guarantee 60% annualized return, and not expect some questions? Anyway, by the time I was done I realized that if I handed over 20 million to these people all I would have in return would be a collateral agreement between me and the developer that would give me title to the land if the defaulted on the check. How many other collateral agreements are out there? I don’t know. Was this guy pushing a ponzi scheme? Possibly. Anyway, let’s move on.

The Dubai real estate game is getting pretty crazy. All the off plan projects are 5% down and marketed as flippable. The agents spend all their time talking to you about the price appreciation and not about the actual building. For example, I looked at one project which had been launched in April. The building was sold out at launch. However, 95% of the units have been relisted by the buyers and are available for sale.(I did the math as I glanced over the listings) The markup: anywhere from 3%-15%. The stock market equivalent of this is day trading a momentum stocks. When it is working it seems like very easy money, as you gear up to maximize intraday returns on small moves. When it’s not, you get taken to the cleaners. But this is to be expected in a super hot market like Dubai. The stuff that really caught my attention yesterday was the developer financed luxury condo projects. In these deals, you pay 50% of the purchase price between now and completion, and the other 50% over a 7 year period commencing after delivery. They guarantee you 11% annual rental income on the property. When I asked how they can guarantee this, the Aussie agent responded because we will rent it out for you. I then asked, “what if you can’t rent it out?” His response: Why wouldn’t we be able to rent it out?

My response: Well, what if there are more apartments than people?

He quickly fired back, “Sir, 200 new families move to Dubai every week, there is no way there will ever be more units than people.” At this point I decided to not even bother, ignorance is bliss.

Anyway, back to the developer financing: 2 agents marketed it to me like this
“No salary certificate, no documents, no banks, no headaches.” Sound familiar? Looks like the elusive ninja marketers are alive and well….they just moved to Dubai. So, where am I heading with all this…To be frank…nowhere in particular. I am not calling a top, and not predicting a crash. All I am saying is the stuff that causes real estate disasters is alive and well in Dubai and gaining momentum. Right now there is a giant faucet of liquidity pouring money over this region and it makes everybody look likes geniuses. But liquidity can be tricky…just when you think you can count on it …it up and moves on to someplace else.

Oh…one more thing…there were a few projects that were in the pre launch phase yesterday. What is pre launch? Well, pre launch is when the developer sets aside a certain percentage of the building to sell before the official launch. They then bank on marking up the price at the launch 4-5 weeks later. When I asked who gets such a deal the agent responded “VIP’s”. I then asked how you become a VIP, she replied “well sir if you are interested in buying pre launch we can make an exception”. According to her, I would be able to sell the building at launch without restriction for at least a 10% profit.

Clearly, I am in the wrong business.

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