Vera Verba

The Great Dubai Crash of 2008-2009

Dubai real estate values will fall far more in the next 3 years than USA values than USA or GB values have dropped in the current sub-prime crunch. Further, they stand far less of a chance of coming back to present levels in our lifetime.

Why?

Because around half of the homes and apartments in Dubai have been “sold” to speculators who would never dream of living in them, but expect to flip them for big profits. They were in fact able to flip deals they bought “off plan-pre-build” for the last few years. But when too may people buy to flip, there is no one left to flip to. Sales have virtually dried up in the past two weeks. Panics can arise out of nowhere and destroy seemingly healthy businesses overnight. Compare with Bear Stearns.

With no end users in sight for all those offices, homes and apartments, all it takes is a few negative rumors & scandals to dry up speculative buying …It has already started. So far the regular media is not mentioning it. When the speculators all rush for the exits at the same time, the “investors” follow . Then banks and lenders are left holding the bag. As Dubai & International Banks in Dubai have made far too many “sub-prime” & “equity release” loans of 100% and more on many properties, it will be a near empty bag. With half or more of all the properties expected by me to be in foreclosure, it is difficult to see any other outcome than an abrupt end to the present construction boom. Then what? A big depression, & a massive exodus from Dubai.

Is this 100% sure? No! Nothing is sure. Something unexpected could change things. The rulers of Dubai might be able to pull a cat out the hat. There is one bright spot: The local Dubai banks & stockbrokers have been doing well managing the money of wealthy Arabs and handling many financial transactions. But their bad bets on real estate and their need for new employees is a drop in the bucket compared to the looming defaults.

Dubai has gone from a population of a few thousand natives a few years ago. They now have infinitely more commercial and residential space under construction than they could conceivably fill. The city is mostly half vacant apartment buildings –housing for 2 million expats, but they are not coming so much any more.. They supposedly have 25% of all the building cranes in the world set in place for new projects. In a word, they are grossly overbuilt and are continuing to overbuild in the face of slackening demand. The grandiose projects, “attractions” and amusement parks built or under construction are doomed to failure. They will be as empty as similar projects built a few years back in Brunei. Why?

Dubai is one of the most unwelcoming, expensive, unpleasant, uncultured places in the world to live.

Dubai won’t grant citizenship & passports to expats no matter how long they live there, legally or otherwise. The climate is unpleasantly hot to put it mildly! It is always so hot you can fry eggs on the sidewalk.

Local “justice” is badly skewed against foreigners.

Cracks are appearing in the whole economic structure as it is revealed that some residential projects that have been partially sold “off plan” will never be built. Deposits can’t be returned because the money has “disappeared.” In a Muslim country it is very easy to see that Christians will be the scapegoats to blame for whatever goes wrong. Would you take a chance at having your right hand amputated? That would be the punishment for being involved in “misplacing” the money of the wealthy local speculators.

No one in their right mind would choose to really live in Dubai without the opportunity to make a fast buck. For PTs who could find ways to profit from all the frenetic activity but were/are ready to move on, it was a fine place for the last few years. But the building boom will probably unravel this year. Even with no income tax, there is not enough there to attract as many wealthy permanent residents, workers, retirees, and an ever growing new population they need to keep it dynamic.

Dubai won’t disappear, but this will be a setback for the country. A lot of investors will get burned. Opportunity for some may be in picking up distressed homes or buildings at a tiny % of building cost. Unfinished buildings may be acquired for a song. Hi-rise apartments are more dangerous at any price. Why? When other tenants [or vacant units] in a condo won’t pay their share for upkeep, the ones remaining will be stuck with the bill –or no maintenance will be done at all.

Well guys, I could write a book on the subject, but just remember you heard it here first.

Gramps

BONUS: A comment from a friend:

I have to agree with you on this … I’ve long thought that Dubai, and to a lesser extent some other rapidly developing Middle Eastern states, have been placing far too much reliance on property growth without
anything fundamental to underpin it. Once the global economic situation worsens, which it will inevitably do, many investors in overseas property will be forced to retrench, which will mean selling at a substantial loss because of the already massive over-supply you mentioned.

The countries which will be affected to a far lesser extent will be those which have been far-sighted enough to diversify their economies into many different fields, not just property and tourism.

Although I’ve not been for a while, from what I hear from several very recent visitors, Dubai is now one over-developed high-rise hell, with massive pollution, noise, traffic problems and no sense of
community. A friend who lives about 15 km from the airport missed his flight to London a couple of weeks ago because it took him almost 2 hours to make the trip. Traffic was that bad; far worse than driving from central London out to Heathrow — and that’s saying something!

I also hear rumours that sales of development plots in “The World” have completely stalled and that there are substantial discounts on offer for unsold or resale properties in all “The Palm” developments.

The property market here in the UK hasn’t (yet) been affected to anywhere near the extent to which many believe. On average prices have only dropped by a couple of percent, and given the 150%+ rises over the last few years, this is insignificant, however as in Dubai the buy to let market has been severely affected with something like 30% of all new builds in many cities still standing empty and forced sale values down by 30/40%. This doesn’t reflect the true residential housing market though as many of these
properties, largely apartments, were originally way over-priced for the investment potential they were supposed to reflect.

It’s going to be a major economic blow to many Brits who have jeopardized their own homes because of high borrowing levels. They “invested” in Dubai. Now, where their apartments could be rented at all, they are getting much lower than expected rental returns. Thus they can’t service the loans on their own homes in England.

We are currently seeing predictions that “the economy” will collapse in the next couple of years. Will the once mighty USA (and Europe along with it) soon resemble 3rd World Sink Holes? Will your business and investments go down the tubes?

Or, could it be that this normal, predictable trough in the business cycle is just another time of opportunity?

If the politicians in your country are incredibly corrupt, ideologically misdirected (like Chavez or Mugabe), and also inept (think Africa, Pakistan , Argentina or the Philippines), a country’s economy can indeed sink and stay down — until a regime change. But that scenario is not likely in the USA — nor in Europe.

Why? Because anywhere there is a relatively free economy with only mildly stupid leaders, boom eventually follows bust.

Then too, regardless of the business cycle or political adjustments that occur in any country what happens to your net worth can be the exact opposite of what happens to your country’s economy as a whole.

It all depends what you bet on [or against!].

How well is the USA economy doing? Depends on whom you ask. Talk
to a homebuilder or a banker heavy into bad loans then you’ll probably get a negative answer. But talk with a farmer or an exporter. You’ll get a very upbeat view. The different perceptions are results of the current weak dollar. Far from being a negative, a cheap dollar is one of those self-correcting mechanisms fueling the biggest export boom in decades.

The weak dollar makes American goods and services cheaper. It slows down imports. This, in classic Adam Smith “invisible hand” economics, will reverse the trade imbalance that has plagued the USA. A comeback for the whole economy is almost inevitable. That is why a depressed stock market always jumps back after panic selling fueled by what I call “the doomsday boys.”

So instead of wringing your hands; panicking that civilization as you know it is about to end, just position yourself to be in any business or segment of the stock market that will do well right now or in a comeback. Diversify and make deals that will make money no matter what. Examples? If you can, pick up distressed real estate or discounted but safe junk bonds that will give you a good return; Go ahead. Just do it! Even if there are foreclosures going on all around you, if you bought right and manage your rental property effectively, in a few years you will have made a bundle. We just sold the house we lived in at double what we paid for it a year ago.

They say that the rate of return or growth on real estate is not as good as stocks. But what these “commentators” say is from people who have never been in a real estate deal. They overlook is that if a $1- stock goes up 10%, you have a capital gain of 10%. But if a 100,000 apartment is sold for 110,000, you probably have a profit of 100%. Why? Because typically, real estate is purchased with a 90% loan. The trick is to be able to support your loan payments with rental income. Or , if you live in the house, the loan payments are just like rent. If you bought place for $1,000,000 with 10% down, and it sells for $2,000,000, how much have you made (as a % profit) on the deal? Beats the 5% you’d get at a bank, doesn’t it?

“Everybody” currently thinks the outlook in the USA is very bad. The “doomsday boys” predict that “everything” will get much worse. As a result, those negative expectations have been priced into the stock market. After the “dot-com” bust and before that in 1987, the doomsday boys were fueling already low expectations with talk of a universal meltdown – the coming crash, the next great worldwide depression—blah blah blah.

Those who predict the end of the world are always wrong.

WHY DOOMSDAY PREDICTIONS SELDOM WORK OUT

The “Principle Of Expectations” is a very important concept to understand if you’re going to profit in the investment markets or become a billionaire.

Right now, almost “everyone” expects the United States residential property market to perform badly in the future.

The public sees entire tracts of brand new homes unable to sell.

They wonder how they’ll ever be able to sell their own houses when new ones are not moving.. On television they see sad tales of home owners being evicted & realtors losing their jobs. Most commentators focus on dire predictions of recession, unemployment, and bankruptcy

What they don’t realize is that the “invisible hand” — those self-adjusting mechanisms of capitalism are working just fine. The stock market adjusts to reflect these negative expectations. The companies who did not manage their risks are down –sometimes bankrupt. Others, like Goldman Sachs are highly profitable–paying their top three executives $66 million dollars each for their efforts in 2007. And even in a down market for financials, GS’s stock price is going up…After every bust comes another boom. It is called the business cycle. And within the business cycle, some stocks and businesses are counter-cyclical.

The question here is, “Will the future prove to be better or worse than the market expects right now?”

Have the sheep again over-reacted? Sure! They always do. Will things get better faster than expected?

Sure! The Feds are injecting liquidity into the system, the politicians are making dumb new laws to bail out bankrupt borrowers.

Yet for the moment the price of virtually all junk bonds, homebuilder’s stocks, lenders and stockbrokers reflects a worst-case scenario.

What should YOU do?

You might think about making a bet on the underdogs. Yet to come may be another terrible year or two at the most, but I expect that with a little “cherry picking” you’ll profit a lot sooner than most people think. My Advice? Buy the stock of well managed companies on dips. Expect a recovery.

Nobody becomes a millionaire by watching TV or reading blogs. You have to place some intelligent bets.

I think starting your own business or investing in property directly is better than merely investing in stocks.

When you own/run things you can control the variables. Example?

During the tail end of the great depression in the U.S.A., around 1940, a
relative of mine picked up at a tax sale auction a run down, virtually
abandoned 36 unit apartment building [in a crappy neighborhood] for a total
of $300, “all cash.”..Yes, that is no misprint: Three Hundred Dollars Total.

He personally moved in to the derelict property and rented out apartments for
$30 a month as he fixed them up. This deal was the foundation of what became a
great real estate fortune. When that neighborhood had gentrified 20 years later
in 1960, each apartment was sold by him as a condo unit at around $100,000.

Total value of property: $3,600,000, in 1960.

Had he [or his heirs] held on, those units today , 50 years later, they are now worth six mes as much , or over $700,000 each.

That’s $25 Million on a $300 investment!

And that kind of return is common as dirt — just average.

In Monaco, the Pastore Family did exactly the same thing starting with

nothing in 1938 or thereabouts. They bought distress property with profits from a cement and re-bar business, and then in WW2, built a few apartment buildings.

They never sold much. Today they own, free and clear, about 25,000 apartments, stores, and warehouses each one of which is worth today, on average, 5 million EUROS.

This makes the Pastore family in Monaco worth more than Bill Gates, Warren Buffet, the Walmart Heirs or anyone else in the Fortune Rich List . They are however quaisi PTs, and not well known — nor even on any rich lists.

Monaco as a country is no economic powerhouse. It has virtually no exports. But some people [including myself] are doing very well here, thank you.

There are also many super rich people in 3rd World Countries who are making very serious money today. There are opportunities everywhere. Thus, even if the USA would become less of a free economy & even if much of the economy goes down the drain—even then — not all investors and property owners there would end up losers. Many fortunes are being made in China where democracy, & freedom are scarce and corruption is rife.

Consider Carlos Slim, according to Forbes, now the richest man in the world. The son of a Mexico City shopkeeper he recently built up a staggering $65 billion personal fortune. The Mexican stock market crash was his opportunity to get into a few deals cheaply. In the early 1980s, Mexico was in the depths of a massive financial crisis. It was much worse than the current situation in the USA. Periodically the elder Slim would round up his three teenage sons for an economics lesson. Sitting them down in the living room of the family home, Slim would produce a handwritten list. One line would show, for instance, how a Mexican insurance company was selling for far less than a similar American insurer. Another would show that compared with European candy or cigarette makers, Mexican manufacturers were drastically undervalued. It was time to buy and get into new businesses, not to retrench or buy gold bars.

Moral of this Tale:

Don’t stand around frozen like a deer in headlights.

Think creatively! Move out of danger into profit. Be prepared with your own optimistic vision. Position yourself to get where you want to be.

– Gramps

P.S. I just re-read an article by one of my favorite authors, Richard Bach. [Remember Jonathan Livingston Seagull ? Uno?] He indicated that the best way to end any prediction or story was:

Everything I said may be wrong.