Dubai’s Sand Castles

As the manager of a Dubai real estate brokerage, Imran Mohamed, a Scot of Pakistani descent, had a front-row seat at one of the most incredible property bubbles ever. Early last year, a few months before the height of the emirate’s boom, he fought his way through the lines at the opening sale of a new waterfront condominium development. Such launches always attracted crowds of investors eager to get the first shot at a new offering, but the buzz that day was especially intense, remembers Mohamed. (He asks that his real name not be used because his company is in financial difficulty and he may leave the country.) Helicopters circled the event “as if David Beckham had arrived at the airport,” he says. Inside, Mohamed put a down payment on an apartment, walked out the door, and sold the unit to a Russian man on the street for double his purchase price. The man paid cash. In just 20 minutes Mohamed had made $408,000. The lesson: “In Dubai, you can throw your ethics and economics textbooks right out the window, because the rules just don’t apply.”

For a long time, the normal laws of economics did not seem to apply in Dubai, the most populous of the seven states that comprise the United Arab Emirates. Abu Dhabi, the seat of political power in the UAE, controls most of the country’s oil resources. With less oil to tap, Dubai has used low taxes, easy money and cheap Asian labor to transform itself into one of the region’s most dynamic economies. The city state developed a kind of signature swagger, expressed most gaudily in the gargantuan real estate projects — an indoor ski slope, man-made islands shaped like palm fronds, the world’s tallest building — that have turned a sandy sliver on the Gulf into one of the world’s fastest-growing cities.

Inevitably, though, the laws of economics have reasserted themselves. Since oil prices plummeted, and world stock markets crashed last fall, some $75 billion worth of real estate projects have been suspended and canceled in Dubai, according to a report by the local branch of HSBC bank. Business journal the Middle East Economic Digest puts the figure at more than $300 billion. Postponed developments include the World, a luxury man-made island community designed to resemble a world map, and Dubailand, a theme park planned to be twice the size of Florida’s Disney World. Housing prices have fallen 20%-40% from their peak in late 2008, and about 30% of the city’s existing real estate space is lying empty.

The gloomiest predictions — that the sand dunes will reclaim the skyscrapers — are overdone. Abu Dhabi has kept Dubai afloat by snapping up $10 billion of a $20 billion Dubai bond issue. Among other things, the bailout money has helped shore up the state-owned development companies behind most of those massive building projects. Still, the shakeout is probably not over yet, according to Saud Masoud, an analyst at the Dubai office of investment bank UBS. Masoud predicts house prices could eventually fall as much as 70% from last year’s highs. “You can’t just put in more capital,” he says, arguing that Dubai needs to be more transparent about the seriousness of the real estate crisis, and diversify its economy. “At some point demand has to meet supply. Dubai needs to think long and hard about rebranding itself into something more than just a luxury real estate investment paradise. Right now investors are scared.”

Dubai’s rise had been decades in the making, but the property market really exploded following a 2003 law change that made it easier for foreigners to own land. With credit cheap and readily available, no income tax, and many more sunshine hours than Britain or Russia, Dubai attracted a new wave of Europeans, who arrived with big hopes and little understanding of Muslim values. In one infamous culture clash, two Britons were imprisoned for having sex on a public beach and insulting police officers after a drunken Friday brunch.

The one language that everyone agreed upon was real estate, and the property frenzy was soon dragging in locals and newcomers alike. Nightclub promoters became fund managers overnight, simply by collecting money from their pub mates back home. “It’s not rocket science,” says Martin Rumney, a 44-year-old former golf instructor from Britain turned Dubai real estate agent. “This is pretty easy money. You just have to be a people person.”

There was just one problem. Though prices rose by as much as 400% during the boom years, few people wanted the finished properties they had purchased — usually off plan, and often well before the first spadeful of earth had been turned. The market was driven by speculators, interested only in trading — or “flipping” — incomplete units, which often sold for more than completed buildings, and might get flipped 10 times before construction finished. “You can’t believe how crazy this was,” says Robert McKinnon, head of real estate research at Al Mal Capital, a local investment firm. “Everyone knew it was like a game of musical chairs. When prices were going up and there was liquidity, you could get three offers by the end of the day. But when prices went down, liquidity dried up, and you got stuck.”

When the bottom finally fell out, many investors found themselves holding properties they didn’t want or couldn’t afford. Others found themselves with nothing at all. Only 70% of the off-plan projects will end up being built, according to McKinnon. More than half of all developers have simply shut up shop or been delisted by real estate regulators; more reputable developers are consolidating projects and offering investors in canceled developments ownership in different locations.

Nigel Knight, a 45-year-old carpenter from Britain, started a lobbying group of disgruntled Dubai investors after he found that the developer of a villa he’d bought near the future site of Dubailand wasn’t depositing his money in an escrow account reserved for construction funds. He suspects his and other investors’ money was used by the developer to purchase more land and then sell off more units without ever starting construction at a single site. “It seems to be some kind of Ponzi scheme,” he says. What’s worse, he then discovered that the company may have sold his property twice. “I thought Dubai looked like the safest place to invest in the Middle East,” he says. “They appeared to have laws that would protect investors.” But Dubai’s real estate regulatory body was set up just two years ago. And Dubai’s legal system gives no right to bring class-action suits, leaving Knight and his group drawing names out of a hat to see which of them gets to go first.

Used Car, Low Miles
Rather than fight the system, many foreigners are fleeing the country. Used-car dealerships have been bombarded by departing foreigners trying to sell their vehicles, but dealers have stopped buying because there’s no longer a resale market. “I’ve got no space; no one has any money; and no one’s buying,” says one. A government-run auction is doing a brisk business selling vehicles that have either been repossessed or been abandoned by their debt-ridden owners at the airport. Local website classified sections are filled with desperate ads offering entire household furnishings — often practically new — for a song. “Relocation forces complete sale of all furniture and household items,” reads one. “Massive savings as a job lot.”

Mohamed, the Scottish real estate broker, is thinking of leaving too. His company is declaring bankruptcy, he says, and security guards recently prevented him from removing furniture from his office because of a rent dispute with the landlord. A local bank keeps calling to ask for the whereabouts of a former employee, a male nurse from Edinburgh who came to Dubai, hit the nightclub scene, bought a Porsche convertible, and then fled home after a week on the job, leaving about $115,000 in debt. “What were [they] thinking, loaning £80,000 to a 24-year-old with no stable job who’d been in the country just eight weeks?” asks Mohamed. “When things are good, no one wants to open their eyes.” He recently bumped into his former employee in Edinburgh. “He said ‘I don’t know you and you don’t know me,’ ” says Mohamed. “What happens in Dubai stays in Dubai.”

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