Thursday, 29 January 2009

Property Poker

This article by Rob Corder from on 9 December '08 explains "flipping".

For what some might call semi-professional property speculators and others might call amateur gamblers, the game is up. Flipping properties – the business of buying villas and apartments off-plan and then selling them before they are built – has made millions for the professionals, but is about to cost the amateurs their shirts. The problem, as with most gambling, is that it becomes addictive and destructive. The value of money changes as you win it. The descent into dangerous addiction for many of these flippers has gone something like this:

They took a punt on their first property around three-four years ago. The earliest property pioneers, who might have bought a luxury apartment off-plan on Palm Island for less than the price of a granny flat in their home country, watched the value of their investment double, treble, quadruple over the first two years.

These were typically high net worth individuals with diversified portfolios who were well-judged in taking a punt on embryonic real estate laws and a visionary development.

Word spread that easy money was being made and the amateurs poured into the market. Conditions were perfect: the market was rising fast; disposable incomes were high thanks to relatively cheap living costs at the time (yes, they really were low four years ago); and banks were ready to lend money to anybody with a reasonable salary certificate.

A gambler would probably have started relatively small, perhaps a modest apartment in Jumeirah Beach Residence. But when that property doubled in value before the tower’s foundations were laid they borrowed again from the bank using the paper profits from their first apartment as collateral.

The banks were even more willing to lend because the punter had a tangible asset as security. Now the player could double-up.

A year or two later, nerves began to set in about the Dubai property market. There was a lot of talk of bubbles bursting and it seemed a good time to cash in those chips. A lot of this profit taking went on at the beginning of 2008, heralding the first signs of a correction.

But the gambler was now hooked. The original investment of 500,000 dirhams had been turned into five million dirhams, and the money was burning a hole in his pocket.

The Dubai market looked like cooling a little, but Abu Dhabi was still red hot. The time for the big play had arrived. Five million dirhams used as a down payment on off-plan property in Abu Dhabi meant the same trick he pulled a few years earlier in Dubai could be repeated in the UAE capital.

If Abu Dhabi followed the same trajectory as Dubai, reasoned the gambler, five million could be turned into 20 million or more.

Then September hit. With hindsight we might now call it the Ramadan Rout. Credit markets seized, making it impossible for property developers to find finance for future projects and individuals unable to borrow money for a mortgage or even a rent cheque.

Confidence evaporated overnight. It was impossible to track the rate property prices were falling because no transactions were taking place. Worst affected was the off-plan market because nobody wanted to buy property that might be worth less when built than it was on paper.

The loss of confidence was not contained to Dubai. Abu Dhabi was hit too. The gambler was suddenly in a cold sweat. When the developer building his properties completes the construction, he will have to find a mortgage to cover the outstanding balance of the price he paid.

But the banks are no longer lending. The properties could already be worth less than he paid for them and the banks do not want to take the risk of lending against a depreciating asset.

If he can’t secure a mortgage, the gambler is sunk and the properties will be repossessed by the developer. The only remaining hope is to sell at a fire sale price before the building is completed.

This is the picture that is being repeated across half-built real estate developments throughout the GCC, and it explains why prices have fallen so far and so fast. Thousands of speculators have to dump their properties before they are completed.

There is no short term fix that will reverse the trend. There is only a hope that prices will eventually fall so far that bottom-feeding investors return to snap up bargains.

The irony is that the same professional property dealers that made a killing on the first off-plan developments will be back to make another killing at the end.Between times, the amateur gamblers have been on an exhilarating ride, but now many are left to rue one big bet too many.

1 comment:

  1. True.

    Things will stabelize when property becomes affordable to your average person. Only then. Paying AED 1 million for a 1 bedroom flat is rediculous.