This article is a continuation of the previous article written on the subject. In fact I will continue a series of writing on this matter as the events are unfolding for the purpose of us learning from this crisis that is ongoing.
So let me go back to the same question: Is Dubai a real estate bubble. The answer is becoming absolutely clear. The prices are already down by varying percentage – some 30%, others 50% down. At this stage it is very hard to say because what is going on is the so called panic selling the “off-plan” properties. In another word, selling properties that are owned on paper – properties that has not being built yet. And the fact is that, there are only sellers and no buyers at all. All buyers are gone (or is it really?) Actually buyers are not gone, they are still there. In the past people has been buying and selling from one to another among the speculators. Almost all of them get caught, and everyone is trying to get out, with nobody new trying to get in; or for that matter, nobody even dares to stay in. So is the price offered (for sale) are real? Most likely not, because no transaction really occurs, at least for the past couple of months. So what will be the real prices of these properties then? Nobody knows, because as the crisis unfolds, most if not many of these off-plan properties might not even be built (at least in the short term), and many of them involves paying more money without being sure of what you will finally get. So the real value might even be zero. That is how bad things have gone, just in a few months.

So, the next question is how much worse it is going to get? How long will be the situation remains like this? Will it ever recover? These are the harder questions because in all honesty, the macroeconomics of Dubai is a transient one. It is built on foreign capital (even though quite a bit of it were from the GCC countries), and not based on its own domestic growth. If they need to survive this situation, they need foreign capital to help them. Unfortunately, it seems that no one is willing; at least for a while and there are good reason why that is the case: first, many others are waiting to see how the global economic situation is going to unfold; second, other countries have their own domestic economy to worry first, rather than saving someone else. Futhermore it won’t be politically feasible, since in GCC countries there were a lot of losses by the investing public in the collapsing stock markets. The public will demand that they being helped first, and not the people of Dubai. (This is quite clear in case of the Kuwait stock market).
Then how about Abu Dhabi government? (They have a lot of money). The answer lies in the economic and political situation between the two Emirates. Both are actually in competition. Abu Dhabi was trying to catch up to Dubai, and today they are even re-thinking about the whole approach and strategy, whether it is the right thing. Furthermore the attitude of Abu Dhabi is not to hurry, that is by throwing good money after bad money. Off course if Dubai is going to sell some of their strategic assets to Abu Dhabi, they might take it, since it is a much quicker way to do what they want to built themselves. An example would be to buy the Jebel Ali Port. Abu Dhabi was planning to build the Al Taweelah Port, which is next to Jebel Ali Port; in the same manner Abu Dhabi was trying to build Etihad Airways in the manner Emirates Airlines did. So, this is their chance to get something that they were trying to do, albeit a quicker and faster way. In any case, long-term economics actually justify that the UAE do not have these many duplications of infrastructure and setups. A takeover (and merger of sorts) is definitely in the right direction. The only thing left is whether Dubai is willing to take this bitter pill (and swallow their pride) or not. This is yet to be seen.
So what is the best thing that Dubai can do? The answer lies in the speed of how they should quickly work to handle the crisis, and take the bitter pills fast and quick. And for this it really means that they have to scale down the projects, and they have to decide it fast and in a dramatic manner. They have to allow investors to restructure the business and companies fast; and they have to really work to at least maintain some level of confidence of the investors in the market. It does not help when some of the Dubai top officials were denying the problems, and even to a degree making statements that they don’t care about “flippers” as one of them said that “flippers go home and only those with long term view stays”. The truth is almost everyone is flippers, including the Dubai people themselves, which are the biggest flippers of all, and they have been living off these flippers to begin with.
The laws in Dubai are new, and at best incomplete to deal with the massive issues that they have to deal with over the next few years, as investors who lost money (or will lose money) will start to test the limits of the laws. As I have studied the contracts that were signed by purchasers, there are too much loopholes that are one sided favouring the developers against the purchasers. In truth, when I saw them, and I was told that this is the template used by almost all developers, then it dawn on me that the court systems will be full of these people contesting one over the other about their rights. And if law of equity going to be applied, the Dubai people are the one to lose the most. So is the Dubai government willing to do that? Or are they just going to ignore that and let those people who lose money just walk away with nothing? If that is the case, then they are done for good, because nobody will ever trust them in the future. It also gives the whole GCC a very bad name and reputation as investments destination.
The funny thing is all these happens while the GCC countries are still ample with liquidity and they still enjoys the oil money, and will remain to be so for a good while. So why doesn’t this bode well for Dubai? The fact of the matter is income from oil is linked to sovereign funds, and they are unlikely to move fast and to be the immediate saviour. The only thing it points out is that in the mid-term (about a few years down the road), only does this liquidity will filter through. By then, investors who are in Dubai are either gone (or finished) and they can’t wait that long. Therefore, Dubai has no choice except to work within its own means; at least for now.
So, what can Dubai (and people who are caught in it) do? I will cover this in the next article.



  1. Indeed, Dr. Wan. Anything is this world is basically like a bubble as well. Last time we heard about Internet bubble. And now Dubai is basically bubble waiting to happen again.

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