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In the summer, developers were trying to shut out speculators but now they are scrambling for buyers.
In the summer, developers were trying to shut out speculators but now they are scrambling for buyers.

Cracks start to show in property market

The organisers of the Property Shopper Show, which opens on Thursday in Dubai, are putting on a brave face.

The organisers of the Property Shopper Show, which opens Thursday at the Grand Hyatt Hotel in Dubai, are putting on a brave face. In advance publicity they are claiming that "thousands of investors are poised to attend the three-day networking event". However, they must secretly be fearing that there will be a dearth of visitors and a line of empty booths. The timing could hardly have been worse. For the past few months, there has been growing concern about the country's property market. After years of breathless expansion, with property prices falling around the world, wise voices counselled that the same thing could happen here. But while estate agents warned of slowing demand, they promised a "soft landing".

In the summer, developers were trying to quell speculative purchases, warning that they only wanted buyers who were prepared to live in the buildings. There was talk that home-loan providers were asking for larger downpayments from purchasers, but just about every industry expert agreed that there was no need to panic. That approach is now looking optimistic, if not downright misleading. Dubai's once booming property market is in turmoil. Six months ago, the car parks outside property shows were full of people fighting to buy apartments; today, interested buyers could probably fit into one space. What developers would do for any buyers, however speculative. According to HSBC Bank, Dubai property prices fell 4 per cent in October - with villas falling by 19 per cent in four weeks from September to last month alone. Property prices in Abu Dhabi have even started falling. According to HSBC, prices were down 5 per cent last month.

Faced with a shortage of buyers and a deluge of distressed sellers, developers have started cutting jobs. Damac Group, the owner of private developer Damac Properties, said it would cut 200 jobs. Emaar Group, the bellwether of the Dubai property scene, has yet to lay off staff, but the stock market is drawing its own conclusions about the state of the company. Its shares fell by 10 per cent yesterday, and it is the second worst performer of the Dubai Financial Market this year, down 77.38 per cent.

The Cityscape event, which took place just six weeks ago and was full of announcements of major projects - including a tower more than 1,000 metres high - now seems a dim and rather distant memory belonging to another age. Six years ago, the scene was very different. Government-owned companies such as Nakheel and Emaar Properties were wowing the world with man-made islands and a skyscraper that is now the tallest in the world. The publicity that surrounded the English footballer David Beckham's purchase of an off-plan villa on Palm Jumeirah when he passed through Dubai en-route to Japan for the 2002 World Cup finals did wonders for the project. He gave it to his parents as a gift.

Also good for sales was the promise of a freehold law opening up property ownership for foreigners who relished the idea of tax-free status. New and ambitious privately owned developers emerged, all wanting to emulate Emaar, Nakheel and Dubai Properties. Few of the newcomers had the scale or financial backing of their more robust counterparts, but believed that the formula of launching a succession of projects, each tagged with the word luxury and selling off-plan, was the winning one. Aldar, Sorouh and TDIC became the pillars of Abu Dhabi, offering replica projects. They were joined by Rakeen and RAK Properties, of Ras al Khaimah.

British buyers were the first to arrive, flush with cash after a surge in the value of their properties back home and looking for reliable sunshine. Other Europeans followed, particularly Russians, who now make up the largest group of property investors in the UAE. Relatively cheap prices, favourable payment plans and more banks offering mortgage deals meant each new tower was sold out quickly, sometimes within 24 hours.

Property prices were fuelled by speculators, who were "flipping" their property before even making a second instalment, and making a killing. But as construction costs rocketed, cracks in the market started to surface. Such signs emerged towards the end of 2006. Developers who sold off-plan at cheap prices could no longer afford to build their projects. Contractors, having not been paid, walked away, leaving some projects unfinished.Some developers, unable to complete their projects, disappeared. Others exploited the appetite for property from international investors to sell developments that were never likely to exist.

The creation of the Dubai Real Estate Regulatory Authority (Rera), followed by the escrow account, in which developers have to deposit all money collected from investors and spend it solely on construction, went some way to reassure buyers, although only projects launched from last year onwards are covered. New regulations and better transparency also gave investors more confidence. But despite rising building costs, a shortage of good contractors and skilled staff, as well as issues with connecting power and water to projects, developers just kept looking to build.

How times have changed. In a bid to counteract slowing sales, Emaar yesterday announced it was easing payment procedures for buyers. Nakheel has also relaxed payment conditions, while RAK Properties is being more flexible with buyers who struggle to meet payments. Abu Dhabi developers are also reconsidering projects. Sorouh is accelerating the delivery of projects, while looking to secure long-term income from rental rather than sales. Al Qudra Holding is targeting middle-income buyers as opposed to the high-end market, while the liquidity squeeze has prompted TDIC to review its yet-to-be-announced projects.

The Dubai Government has set up a committee to review the feasibility of major developments. Aldar Properties, like most other firms across the Emirates, is taking a more cautious approach, although all remain outwardly confident that the strong fundamentals that make up the economy will shield them from a severe storm. Some analysts predict a wave of consolidation across the industry, with the big players snapping up struggling ones.

Other industry experts say the slowdown is a good thing. Not only will it weed out speculators, but it will lead to a more stable and normal market, where people buy homes to live in.

It is not as though the buyers have disappeared, particularly in Abu Dhabi. The city is yet to build enough houses to satisfy demand. While there are reports of distressed sellers being forced to liquidate their holdings because they need their deposits back, others are searching for villas, have arranged the financing, but cannot afford the asking prices. While the Government has been quick to follow up allegations of fraud in the construction and financing industry, it has been surprisingly tightlipped on the unfolding property crisis, which makes up about 30 per cent of Dubai's economy.

But there are finally signs that the authorities are aware of the problem - and starting to act. At a Central Bank meeting on Tuesday, the board discussed a proposal for introducing financial vehicles for dealing with property loans. The fear is that a further drying up of credit - or people panicking and withdrawing their deposits - will have a knock-on effect. According to the Central Bank, banks hold Dh142.5 billion (US$38.79bn) worth of property loans.

A weakening property market could set off a chain of defaults, and losses for everyone in the business. At least if anyone shows up at the Property Shopper Show at the Grand Hyatt, they will have something to talk about. rwright@thenational.ae agiuffrida@thenational.ae

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