Thursday, May 19, 2005

UAE Markets

Aabar IPO story continues
Well, it looks like the proverbial has hit the fan in Abu Dhabi after it emerged that some banks had flouted central bank regulations and loaned clients up to ten times their own contribution to buy shares in the Aabar IPO (see here for a recap, it’s about halfway through). Shuaa Capital reports that the Central Bank is penalising 4 national banks for breaching the lending limit of 4 times the cash contribution and for breaking their own exposure limits.

The names of the 4 banks haven’t been released, but I’ll be keeping an eye out to see if the names trickle out somewhere.

Real Estate
I don’t entirely know how to describe the atmosphere of the UAE markets at the moment. The government is very keen to present an image of fiscal probity and economic responsibility, but investors seem to be as frantic as a bunch of Mexican jumping beans in a very small jar. Nowhere is this more apparent than in the property market, which is dominated by off-plan – designed but not yet built, to the uninitiated – dwellings in high profile developments like the infamous Palms. Most of these properties sell out in a matter of days, and it seems that most of them go to GCC investors with little intention of actually living in the properties. The frenetic pace of the market, combined with Dubai’s all-too-successful hype has consisted driven prices upwards, despite the fact that many of these residences have yet to be completed. The situation was enough to worry the director of Nakheel, the company behind the Palms and other projects: in January he warned that speculation was too large a proportion of market transactions.

Despite the forced optimism of most of the local news outlets – whose coverage ranges from superficial arguments saying that ‘prices are going up because Dubai is a good investment’ to more nuanced arguments drawing comparisons with the foreign property markets. Most of the foreign arguments tend to hinge on interest rates – they argue that because interest rates are low in the UAE, people will be able to take out mortgages to buy property which will keep the market buoyant. The problem is, speculators have access to lending at the same interest rates, and can borrow quite a bit more, allowing them to crowd residents out of the market – precisely what is happening at present. In any case, none of these arguments seem to be convincing the people on the ground – a survey (pdf) conducted in March by MEED and HSBC showed that 83.3% of respondents believed that the UAE was experiencing a property bubble and was due for a market correction. Granted, as Everett-Heath (a director at Kroll) points out, most seem to think that the correction is still some way off – not until at least 2006 – but to be honest that kind of logic makes me feel uncomfortable. Make hay while the sun shines, sure, but don’t pull the barn down to make more room for the hay. Or something. My metaphors are strained these days. The problem is that our innate tendency (doc) to loss aversion seems to mean that people are reluctant to pull out of the market when they should – rather than take their gains and withdraw from the market, they stay involved for fear of losing out. It comes down primarily to the way in which the market is framed, which is where all the hype comes in: the papers emphasise the upside potential of the market and hype up the danger of prematurely exiting the market, which essentially frames the investment decision as a loss avoidance issue rather than what it really is, which is a gain on investment issue. I suspect the more sophisticated investors are well aware of the true nature of the investment decision, but I wonder how many of the people pushing prices upwards could be called sophisticated investors. Most anecdotal evidence seems to be that many people are getting involved on recommendations from friends, who point out the upside potential and then back it up with “it’d be a shame to miss out.”

At the same time, rental prices are increasing. A report (pdf) by a local job agency suggests that rental prices are beginning to force people out of Dubai, which isn’t good for the future of the property market. The optimists argue that once all the off-plan properties are completed, the increased supply will dampen rental prices and provide a soft landing for the boom. That’s one possibility, yes: the other is that a sudden spike in supply could make rental prices drop suddenly, which would then reduce the values of the properties to the investors. Given the volatility on the upward curve, there’s every reason to believe that the market will react in just as hysterical a fashion and all the loss-averse investors will pile out of the market as quickly as they piled in. That’s something the Dubai government is going to have to be very careful about, because the future of the emirate’s economy depends on it – research by EFG Hermes suggests that property is about to overtake oil as the largest contributor to Dubai’s GDP.

Meanwhile, delays, difficult labour relations and materials ‘problems’ are continuing to dog the construction of all these off-plan developments. Yay!


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