VZCZCXRO5285
OO RUEHDIR
DE RUEHDE #0012/01 0130645
ZNR UUUUU ZZH
O P 130645Z JAN 09
FM AMCONSUL DUBAI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6340
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEHAD/AMEMBASSY ABU DHABI PRIORITY 3376
RUEHDE/AMCONSUL DUBAI PRIORITY 9571
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 DUBAI 000012 
 
SENSITIVE 
 
DEPARTMENT FOR NEA/ARP BMASILKO 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV ETRD PGOV AE
SUBJECT: DUBAI'S REAL ESTATE PRIMER 
 
REF: 07DUBAI2878 
 
DUBAI 00000012  001.2 OF 002 
 
 
¶1. (SBU) Summary.  A substantial portion of the Dubai real 
estate boom (and subsequent bust) was fueled by regional excess 
liquidity, negative real interest rates, and speculators and 
longer term investors riding the rocketing price wave.  However, 
the Dubai market differs substantially from the typical U.S. 
real estate market, and it is these differences that put the 
sector at risk in the current economic environment.  The 
following is a basic primer in the uniquely Dubai factors (some 
of which spread to neighboring Abu Dhabi): the "off-plan" sale, 
the high numbers of speculators rapidly flipping units, and 
long-term investors eschewing rental income on completed units. 
It is these three factors that will most likely exacerbate the 
pain felt if and when the Dubai real estate dream bursts.  End 
Summary. 
 
Buying "off-plan" 
----------------- 
 
¶2. (SBU) When Dubai opened property ownership to expatriates in 
2002, it was in newly designated "free zones," completely devoid 
of existing housing stock.  Developers, anxious to cater to the 
pent-up expat demand, started offering eager buyers the 
opportunity to purchase their apartment or villa "off plan" 
(based on architectural drawings and plans for buildings that 
had not yet broken ground).  These developer-financed contracts 
typically required small down-payments, as low as five to ten 
percent of the purchase price.  As time milestones (and more 
recently, construction milestones) pass, buyers are required to 
make additional percentage payments on the contract, culminating 
with a final payment once the unit is completed and turned over. 
 While there is some turn-over in completed homes and 
apartments, the vast majority of Dubai real estate deals, up 
until late 2008, were for developer financed "off-plan" units. 
In turn, most of the developers secured funding through project 
financing deals at local banks (using the land and other assets 
as collateral). 
 
Rise in speculation 
------------------- 
 
¶3. (SBU) With the rising price of oil in 2005, loose 
international credit policies, and foreign capital inflow 
(falsely) anticipating a de-pegging of the dirham, liquidity 
flowed into the Gulf and into the various Dubai developers' 
projects, pushing prices up at escalating rates.  Speculators, 
recognizing an opportunity, started buying highly leveraged 
property with minimal down-payments, intending to resell the 
unit before additional payments were required.  For example, 
invest 100,000 AED as the 10 percent down-payment on a one 
million AED property, and if the price goes up ten percent, to 
1.1 million AED before the additional payment was required (a 
common occurrence in the 2005 to early 2008 market), a 
speculator selling the unit at the new price cleared 100,000 AED 
profit on the 100,000 AED investment - not bad for a short-term 
investment.  During 2006 and 2007, it was not uncommon to hear 
of off-plan sales events selling out within one of hour opening 
and units being flipped at a substantial profit within the same 
day. 
 
Holding onto an investment 
-------------------------- 
 
¶4. (SBU) Not only did speculation hype demand, legitimate 
investors also exacerbated the problem by keeping completed 
units vacant, neither leasing nor re-selling them.  In fact, 
overall "new Dubai" occupancy rates mid 2008 were estimated at 
65 percent, with some new luxury developments like the 40 
building Jumeirah Beach Residence complex only 45 percent 
occupied.  With double digit annual rent and sales price 
inflation, investors were reluctant to lease or sell, afraid 
that they might not have yet ridden the market to its peak. 
Under Dubai's rent cap law (reftel), yearly maximum rent 
increases were limited to five percent per annum in 2008.  Once 
a unit is leased, the contract remains valid even if the unit is 
sold, and it is relatively difficult to legally evict a tenant. 
For this reason, occupied/rented units sold at greatly 
discounted prices compared to similar vacant units.  Some 
investors were willing to forego several years' rental income in 
anticipation of bigger ultimate returns. 
 
¶5. (SBU) What remains unclear is who owns the unoccupied units 
and why they continue to be held off the market.  As detailed 
above, some are held by long-term investors following a profit 
maximization strategy.  Others are held as legitimate second 
homes:  conveniently located near Iran, Pakistan and other less 
 
DUBAI 00000012  002.2 OF 002 
 
 
stable countries, common lore is that many of the units are 
"bolt-holes", purchased for their accompanying residency visa 
and as an asset safe-haven.  However, local rumors from well 
informed sources have also speculated that up to 70 percent of 
these units are held by the Dubai government, Dubai parastatals, 
the Al Maktoum family or other influential families/businesses. 
The underlying rationale being that the units were initially 
held off the market to drive up prices and now are being held 
off to keep the market from entering a free fall. 
 
Comment 
------- 
 
¶6. (SBU) As 2008 came to a close, the market for off-plan, 
flipped units evaporated.  Speculators are scrambling to make 
the next payment installments or, increasingly, simply walking 
away (while actual default numbers are not available, 
anecdotally a local newspaper recently reported that over 3,000 
cars have been abandoned at UAE airports - an indication that 
expats, increasingly unable to cope with unemployment and debt 
levels, are simply abandoning their financial obligations and 
heading home).  Whether long-term investors will start 
liquidating their investments is still unclear; however, rental 
prices are starting to fall, suggesting either excess supply 
(investors renting their units), decreased demand (unemployed 
expats are departing the UAE) or, as is more likely the case, 
both.  The medium term implications could be severe, as a 
housing glut exacerbated by increasing unemployment and 
increasing loan defaults could trigger even further pull back an 
economy already at risk.  End Comment. 
 
 
 
UNRUH 
GAVITO