The country's property market is at a crossroads. While officials and economists say the underlying economy remains sound, which way prices go, and by how much, may depend on people outside the UAE such as Abid Hashmi. Mr Hashmi, who runs an advertising firm in Lahore, Pakistan, came to Dubai this week looking to buy some property. Foreigners have always been the lifeblood of the nation's real estate boom, and South Asian investors in particular have become the driving force behind demand. In the past two years, investors from India and Pakistan have emerged as the biggest property buyers in Dubai - the white-hot centre of UAE realty - from small business people such as Mr Hashmi to Bollywood superstars including Abhishek Bachchan and Aishwarya Rai. They top a list of investors from around the Gulf, Iran and Russia who have been pouring money into Dubai property since it opened to foreign ownership in 2002 and helping to transform it into one of the world's most vibrant and cosmopolitan cities. The demand has been so steady that many analysts and property executives say the city has vaulted on to a short list of cities, including New York, London and Hong Kong, that retain their allure in hard times, serving as a magnet for talent and a safe haven for money that insulates them from the worst of any downturn. "What might have happened in a century in Hong Kong is happening in 10 years here," said Blair Hagkull, the managing director of property management firm Jones Lang LaSalle in Dubai, "If you're from this region, this is the centre." Many analysts say this is likely to keep Dubai's property boom going, even if prices rise more slowly. Foreigners will continue to be drawn here, they say, even more so as their own economies head into difficulties.
But Dubai's gravitational pull is about to be tested. The global economy is in a tailspin and Pakistan and India are being pulled down with it. According to data from the online property information service Reidin.com, the sharp surge in demand from South Asia since 2006 that helped send prices soaring may now be succumbing to the turmoil. Reidin.com's statistics, which compile every land transaction registered with the Dubai Land Department since 1973, illustrate what agents and analysts say is a worrying shift in South Asian demand. The bulk of purchases still comes from wealthy Pakistanis and Indians moving into luxury villas to escape political strife and taxes. But a powerful surge in recent months has come from smaller investors who buy apartments in Dubai even though they don't intend - and can't afford - to move in themselves. Instead, they hope to sell them for a quick profit or sit back at home collecting rental income. Now panic appears to have gripped these investors, agents and developers say, as economic worries sap interest from new buyers and those Pakistanis and Indians who hoped to sell before making their second payments scramble to sell.
"The scene is so bad now I'm expecting a big crash," said Bunty Gupta, a developer and investor who moved to Dubai from Mumbai in 2005. "There are no buyers." After peaking in May, monthly average prices in Dubai began slipping, according to Reidin.com's data, with a sharp slide in the number of deals last month helping to send prices in the third quarter down three per cent from the previous three months. If property prices were to fall for a sustained period, it could spell trouble for the country's efforts to diversify away from oil. Much of that effort has simply supplanted oil with land. By 2006, property and construction had become the UAE's largest employer, accounting for 17 per cent of the economy. The Government's aim was for the sector to account for a quarter of gross domestic product by 2010. Achieving that, however, depends on a continuing inflow of people to occupy the properties being built. So far, immigration has delivered. The UAE's population has been growing about six per cent a year, and is on track to rise from 4.5 million last year to more than five million by the end of next year, according to the Ministry of Economy. This summer, the ratings agency Fitch warned that the economy was vulnerable to any decline in immigration, a concern echoed by its peers. "Domestic demand for property is insufficient," said Farouk Soussa, director of sovereign ratings at Standard & Poor's in London. Without demand from abroad, he said, "we would see a strong correction in housing prices". The trouble is that construction to accommodate this influx has been financed by borrowed money. Lots of it. Dubai's debts now exceed the size of its economy, according to Moody's Investors Service. "Lots of Dubai's construction boom was financed with borrowed money," said Brad Setser, an economist at the Council on Foreign Relations in New York. "I suspect credit growth will be more constrained, which may cause a host of knock-on problems." The International Monetary Fund says Dubai is in no danger, but concerns among investors have sent the cost of insuring the debt of Dubai-backed companies up four-fold since May. Borrowing big to dig has been vital to Dubai's success. The grandfather of Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, borrowed £500,000 (Dh2.9million) back in 1958 to dredge out Dubai Creek. That helped turn the city into a regional trading centre. His father borrowed heavily again to build Jebel Ali port. It has since become the largest container port between Rotterdam and Singapore, turning Dubai into a global logistics hub. Immigrants from India, Pakistan and other neighbours have played an important role in this transformation, supplying Dubai with a steady stream of talent, skills and money. Lured by low taxes and political stability, they are helping Dubai realise its ambition of becoming a hub for tourism and finance. Indians have been part of Dubai's commercial landscape since at least the mid-19th century, arriving as representatives of British companies in the subcontinent. More came to take part in Dubai's pearling industry, becoming such a vital part of the economy that they were given land on Dubai Creek on which to settle. Until the 1950s, these merchants and their hawala system of credit served as Dubai's de facto banking system. More Indians landed in Dubai in the 1950s to circumvent newly independent India's barriers to imports, with many using Dubai as a base for smuggling gold and western goods back home. Wealthy Indians coming to avoid expropriation and taxation ploughed their fortunes into businesses, some of which remain household names today, such as Jumbo Electronics and Jashanmal. Families from Pakistan began arriving in the 1960s to open shops, tailors and barber services. Many more came from Baluchistan province to join Dubai's new police force. By 1976, Indians accounted for 30 per cent of Dubai's population and Pakistanis about 10 per cent. "South Asians have been crucial to Dubai's success," said Christopher Davidson, who earlier this year published a history of the emirate, Dubai: The Vulnerability of Success. "The South Asian business community remains a key pillar." But aside from a few privileged traders, these immigrants were not allowed to buy property, which remained limited to Dubai Emiratis and Gulf nationals. As Dubai's economy boomed, newcomers vied for a shortage of villas in Jumeirah and apartments in Bur Dubai. By 1992, residents were already venturing out to Sharjah in search of accommodation. Linda Mahoney, a Canadian nurse who arrived in Dubai in 1981 and eventually built one of the UAE's biggest property firms, Better Homes, recalls a chaotic market where investors built villas in the middle of the desert with no access roads. "They used to just put villas out in the middle of nowhere," said Ms Mahoney, now the company's chief executive. Arenco Real Estate, the property company, broke the mould, she said, by hiring architects to design western-style villas with double garages and indoor kitchens that remain a favourite among western expatriates. But it was Emaar, the developer set up in 1997 by Dubai's former head of economic development, that set the stage for the rush of South Asian property investors when in 1998 it launched Emirates Hills, a planned community of secluded villas nestled around a golf course where foreigners could buy property on a 99-year lease, a first for Dubai.
Emirates Hills became the neighbourhood of choice for well-to-do Indian and Pakistani émigrés. "Everybody came out because there was instability in Pakistan," said Sharjeel Bijdani, second vice-president of corporate finance at Habib Bank AG Zurich and a Pakistani who himself owns four Dubai properties. The enclave even afforded refuge to the former Pakistani prime minister Benazir Bhutto and her family after she went into self-imposed exile in 1998 to avoid corruption charges at home. To this day, Emirates Hills remains the most popular destination for South Asian investment in Dubai property. In May, 2002, Sheikh Mohammed, then Dubai's Crown Prince, decreed that Dubai would be the first emirate to allow foreigners to buy freehold title to property in developments such as Emirates Hills and Nakheel's newly launched Palm Jumeirah. The property market exploded. "You had this sea-change in market demand," recalled Mr Hagkull, who first came to Dubai from Vancouver in 1999 to help Emaar develop Dubai Marina. Buying freehold meant having the right not only to sell a property, but pass it on to one's children. Buyers began to pour into Dubai from the world over - from India and the UK, Europe, Africa and even Central America, sparking other emirates to follow Dubai's lead by offering freehold themselves. Ms Mahoney recalls the next few years as Dubai's "buccaneer" period. Lingering uncertainty over the legal rights of foreign investors meant that most purchases were still from Gulf neighbours. So in March, 2006, Dubai issued a law enshrining foreigners' right to own freehold property in designated areas. That year, British buyers overtook Gulf investors as Dubai's biggest property investors. It was a short-lived reign. Last year, Indian buyers took the top slot. The Indian film hero Shah Rukh Khan bought a villa on Palm Jumeirah. And earlier this year, Abhishek Bachchan and Aishwarya Rai bought an unfinished luxury villa where, according to the plans, they will be able to watch their own movies on a Bang & Olufsen home theatre system before stepping out on to a golf course designed by Greg Norman. Investments by the stars may grab the headlines, but this year Pakistani investors quietly overtook Indians as the largest buyers of Dubai property. Driven in part by their country's volatile political situation, Pakistanis have accumulated at least Dh2 billion (US$544 million) of Dubai property this year. Their purchases peaked in August, the same month former president Pervez Musharraf resigned. More Pakistani investments are reportedly pouring into the emirate of Ajman. It is this kind of demand that put one quarter of the world's construction cranes over Dubai and helped push property prices up an estimated 78 per cent last year. But questions have risen over the quality of this demand. Many sceptics say some of the regional demand, including that from India and Pakistan, represents "black money" that is being laundered in Dubai through the property market. But if Dubai is susceptible to such money laundering, analysts say it would only serve to make the emirate's property market more resistant to a downturn. A greater source of weakness, they say, is the explosive growth in off-plan sales, whereby developers sell properties that exist only in blueprints to buyers for a deposit of only five per cent or 10 per cent of the total purchase price. Buyers can then sell the property, or "flip" it, without ever having to obtain a mortgage, pocketing the profit before having to find the down payment a bank would require. That's what Mr Hashmi said attracted him to Dubai from Lahore - the chance to buy a freehold property off-plan. Off-plan sales are also attractive to developers, allowing them to sell properties and use the cash to finance construction, lowering their overall risk. In July, economists at Standard Chartered Bank warned that, thanks to rampant flipping, unfinished properties in Dubai were selling for the same price as properties people could actually occupy. Rising construction costs and project delays contributed to a worsening shortage of housing, meanwhile, pushing up rents that helped push inflation to nearly 11 per cent last year. Confidence remains high, however, that Dubai will retain its allure for foreigners, and even attract more as their own economies slow. "There's something like a spirit to Dubai," said Marwan bin Ghalita, chief executive of the Dubai Real Estate Regulatory Agency. "People fall in love with Dubai." If nothing else, Dubai controls the supply of new property, analysts say, and can therefore calibrate it to match demand. But in a controversial report in July, analysts at Morgan Stanley warned that projects due for completion by 2010 could create an oversupply and push prices down as much as 10 per cent. South Asian investors and agents, however, are concerned about the outlook for demand. Some fear they will see a repeat of what happened to British investment in Dubai. After peaking last year at Dh1.6bn, net purchases by British investors this year have plummeted, reaching only Dh441m in the first nine months of the year. Analysts say British investors' appetite has been clipped by a falling pound, which makes property in the UAE relatively more expensive, and by falling property prices at home. "There's a large element that is borrowing in the UK and mortgaging their houses in the UK to buy in Dubai," said Mr Soussa. The problem for South Asian buyers, according to analysts, is that as their countries' economies outlooks dim, demand for Dubai property has shifted to the middle class and away from wealthy individuals less vulnerable to the economic downturn. "Even local agents in Pakistan are selling UAE property," said Mr Bijdani. These less affluent buyers are more likely to buy off-plan, agents say, and less likely to move in once their properties are completed. "It's mostly for investment. There aren't a lot of end-users," said Anjili Samtani, an agent at Megabucks Realty. Economists say the growing prevalence of absentee landlords is contributing to rising rentals and inflation. But for South Asian buyers, earning rents equivalent to 11 per cent of their purchase price as their own currencies depreciate against the dirham is a compelling investment. As a result, less affluent South Asian buyers have been turning away from expensive villas in Emirates Hills to cheap apartments in International City, Nakheel's sprawling new hive of accommodation in the desert south of Dubai. With rising rents providing yields of up to 10 per cent, International City in August eclipsed Emirates Hills as the top destination for South Asian investment. "They're going for rental income," said Abdul Rehman, a property broker in Karachi who bought a one-bedroom unit in International City that he rents out. "And they get their rent in dirhams." But as the Indian and Pakistani currencies plummet - the Indian rupee has dropped by more than 20 per cent against the US dollar this year; the Pakistani rupee by 24 per cent - Dubai property becomes less affordable for new South Asian buyers. Many have been warned off by reports that the Dubai market may be poised to fall. As a result, new buyers are getting harder to find. After peaking in May, purchases by wealthy Indians and Pakistanis in Emirates Hills have slumped. Purchases in International City surged in August and last month, but not enough to prevent a sharp overall slowdown in South Asian buying. "Initially it was very nice. I came here and made a couple of investments and flipped those properties in three months and got 70 to 80 per cent on my money," said Mr Gupta. "Those days are gone." The shortage of buyers has sent those who bought off-plan scrambling to sell, said Mr Bijdani, the banker. "The people who are caught are the people who never could have got a mortgage from the bank," he said. "They are panicking." Agents say they are confident the money from Pakistan and India will flow again once markets stabilise. "The situation there is just too unpredictable," said Amir Syed, a Pakistani agent working in Dubai. "But so is the situation in Dubai." After scouting out the scene in Dubai, Mr Hashmi, the Pakistani advertising executive, flew back to Lahore empty-handed. "I'm still interested in owning here, but the situation is not good," he said. "It's still wait and see." warnold@thenational.ae
