Many who overreached in the golden years are shedding planes, yachts and cars for a song, making it a buyer's market.
Buyers sitting pretty in luxury market
DUBAI // Mohammed Kharma, wearing a dapper tweed jacket and a blue tie, is touring a barely used 70-foot Icon yacht in the Dubai Marina. He looks over the cabins, checks the finishes and talks to the captain. It is part of a weekly ritual for Mr Kharma, a Dubai businessman who has bought three discounted yachts from sellers in the past year on behalf of wealthy clients.
"At the end of the day, this is the best market right now," he says. "There are excellent deals. You can take off 30, 35, even 45 per cent of the price of a new yacht - Many people have commitments to the banks and they need to sell right away." Businessmen such as Mr Kharma are taking advantage of a unique situation in the Emirates, where wealthy individuals and luxury goods brokers are trying to unload an unprecedented number of yachts, private aeroplanes and sports cars that were acquired during the boom times.
The distressed-asset market for luxury goods in Dubai and Abu Dhabi is among the largest in the world right now, brokers say. "In the last five or six years, even people who could not afford it were buying luxury goods," said Sam al Abbasi, the managing director of 4Yacht Arabia and a long-time seller of aeroplanes, finely crafted watches and yachts. "There are a number of people who rose to the top and then went down completely. They need to sell right away."
Dubizzle, the classified-advertising website, saw a peak of distressed-asset sales last summer. Those sales are waning as the global economic situation improves and some confidence returns to the region, says JC Butler, a co-founder of the website. A big portion of the distressed-asset market is taken up by performance cars, which are often the entry point for a businessman with a high salary and large bonuses. Al Aweer Used Car Market on the outskirts of Dubai is exporting nearly new Ferraris, Range Rovers and Aston Martins around the world.
"Al Aweer is probably the cheapest place in the world to buy luxury cars," said Mr al Abbasi, of 4Yacht Arabia. For cash buyers, large assets such as private aeroplanes are looking attractive compared with the past five years because prices have fallen to more reasonable levels. Jets were in such short supply a few years ago that asking prices were higher than those charged by the aircraft makers, said Emad Sharghi, the chief executive of Executive Air Sales (EAS) in Abu Dhabi.
"Like all asset bubbles, this one was created by irrational behaviour," he said. "From 2006 to 2008, the irrational behaviour was on the part of aircraft owners; they wanted to charge more than the aircraft manufacturers themselves." This happened as executive aircraft were caught in the speculative bubble that also ensnared UAE off-plan property, being bought and sold quickly as prices quickly rose. Business jets were snapped up by the newly rich and companies with access to easy credit.
The situation has reversed as buyers are demanding huge discounts, Mr Sharghi said, causing a stalemate in some cases. "Now the irrational behaviour is on behalf of potential buyers who say, if the price is US$24 million [Dh88.1m] to $25m for a jet, 'I'll give you $17m,'" he said. "For what they are offering to pay, they are not getting it." Business jet charter operators in the region have also suffered. Demand is down by 30 per cent compared with two years ago, said Claudio Lietaert, a broker with Air Charter Service in Dubai.
This has led several operators to delay the delivery of executive jets they ordered during the boom, or cancel their orders altogether. The Middle East has still fared better than North America and Europe, both of which have large excesses of jets, and this has exacerbated the illegal practice of foreign charter firms leasing their planes out in the region, a practice called "grey market" chartering.
Exact figures are sketchy, but this practice is thought to have attracted more than 100 jets into this region to conduct unlicenced flights, local officials say. "Nobody knows for sure; if we knew how many aeroplanes were doing this, then it would not be called the grey market," said Ali al Naqbi, the founding chairman of the Middle East Business Aviation Association. Lacklustre demand and increasing competition have led some charter operators to offer flights at below cost.
"This is a dilemma in the industry," Mr Lietaert said. "The question everybody is asking is: 'Is it really worth operating below cost or better not to operate at all?'" Distressed sellers are also common in the property market, but most of these are for off-plan properties for which there is little demand, said Tom Bunker, an estate agent at Better Homes in Dubai. "The distressed sales that are out there are for people who thought that their rental income would pay for their mortgage, but it doesn't," he said. "Some people can't afford that. They are in serious distress."
There are good opportunities for investors with a discerning eye for property, Mr Bunker said. Some of his clients simply want to get out of the Dubai property sector so they can cut their losses and put their money in a new type of investment. One of Mr Bunker's sellers told him recently to sell two office floors as quickly as possible, even at a loss. "Maybe they are not a distressed seller in the typical sense, but they want out of real estate," he said. "Those are good deals if you take a longer-term view."
More of these deals could flood into the market if the courts start processing foreclosure requests from banks. Barclays Bank recently said it had won the first foreclosure in Dubai. Property that has been foreclosed on should be sold in a public auction under procedures from the Dubai Land Department, lawyers from Herbert Smith have said. "There will still be opportunistic buyers around who will see a good deal and jump at it," the firm said in a note. "However, they will need to be cash-rich buyers due to the scarcity of debt finance. Even where debt finance can be raised, the ratio of that finance to value - known as the loan-to-value ratio - is likely to be considerably lower than two or three years ago."
* with additional reporting by Gureni Lukwaro and Amy Leang @Email:email@example.com firstname.lastname@example.org