Bargain prices on the Palm

From BI-ME and Dow Jones Newswires, 12 March '09

Once the best-known symbol of Dubai’s explosive growth, Palm Jumeirah now looks to be one of the biggest victims of the Emirate’s property slump.

Dubai’s Palm Jumeirah, the self-proclaimed ‘eighth wonder of the world’, has become a symbol of the Emirate’s economic vulnerability as plummeting real estate prices unravel its boom town image.

Leading brokers say that prices on the development have slumped 50% since September, while local newspaper classifieds list hundreds of luxury villas and apartments on its 16 fronds as owners try to off-load unwanted homes. A four-bedroom garden home now lists for AED 6.5 million (U$1.8 million), down from AED 14.0 million last July.

“Palm Jumeirah was one of the catalysts of the Dubai real estate boom,” said Edward Carnegy, a surveyor for CB Richard Ellis Middle East. “But the gap in the prices investors were willing to pay, say in mid-2008, compared to the finished article was huge and needless to say, unsustainable.”

Once the best-known symbol of Dubai’s recent, explosive growth, Palm Jumeirah now looks to be one of the biggest victims of the emirate’s property slump.

Dredged from the seabed of the Arabian Gulf at a cost that rose to more than US$12 billion, the vast Palm Island project helped catapult Dubai into the ranks of the world’s most desirable locations. That status is now under threat as real estate prices plummet and the government struggles to cope with US$80 billion of debt.

Last week, some brokers said prices on Palm Jumeirah dipped below AED 1,000 per square foot for the first time since prices began to fall last year.

At the height of the boom, some of island’s signature villas sold for US$12 million, while a penthouse in the planned Trump International Hotel & Tower reportedly sold for a Dubai record of more than US$30 million in June.

Since then, the US$1.1 billon hotel and apartment tower, being built in partnership with US real estate magnate Donald Trump, has been put on hold, leaving a gaping construction hole at the centre of the Palm’s trunk.

And as the value of properties on the Palm sink, so to do the fortunes of its developer, government-owned Nakheel. The company, part of the business empire of the Ruler of Dubai Sheikh Mohamed bin Rashid al-Makhtoum, is being forced to take drastic action to keep its business afloat.

Recent steps to cut costs include cutting 10% of its workforce and delaying construction work at two other offshore developments, the Palm Jebel Ali and the Palm Deira. The company denies that Palm Jumeirah is suffering any downturn from the global economic crisis.

“Palm Jumeirah is one of Dubai’s most recognisable icons. Its success as a residential community and tourist destination will continue to grow,” says Johann Schumacher, Palm Jumeirah’s Managing Director.

True enough, the development has attracted some of the biggest names in entertainment with sporting celebrities such as British soccer players David Beckham and Michael Owen, and former Grand Prix racing driver Michael Schumacher said to be amongst the list of celebrity owners of its luxury villas.

“Palm Jumeirah was extremely well promoted at its launch with celebrities buying property there and a lot of glamour surrounding the project. Prices there rose very fast as a result and are now seeing a correction along with the rest of the Dubai market,” said David Camp director of Economic Research Associates, an international real estate consulting firm.

To be sure, many investors still view the Palm as the Beverly Hills of the Gulf region.

Simon Murphy, a 42-year old Briton and former hedge fund advisor, was lured into buying property on the palm by its celebrity kudos. He was part of an initial wave of investors to snap up property on the huge man-made, palm-shaped island.

“There’s a certain snob value to living on the Palm and people here are justifiably proud to have a pretty cool postcode,” he said. (Dubai has postcodes? Since when?)

He bought his ground floor shoreline apartment over the telephone for AED 870,000 without seeing a floor plan or any other information about the property. At the height of Dubai’s property boom in July 2008, Murphy received offers of up to AED 6 million for the apartment, but refused to sell.

Despite the uncertainty surrounding the future of the Palm Jumeirah, Murphy says he’s not too concerned. He points to the near 600% increase in average prices on the Palm between 2002 and the Summer of 2008, before the current downturn set in.

Also feeling the squeeze, is the US$1.5 billion Atlantis Palm Hotel, a joint venture between Kerzner International Holdings and Nakheel, which sits at the crest of the mammoth development.

Just months after a US$20 million lavish opening party, which saw a 2,000-person, star-studded guest list and the world’s largest fireworks display, the hotel where rooms start at US$800 a night and go up to US$25,000, is struggling to attract guests.