Giant Taj Mahal Can’t Hide Dubai’s Weak Real Estate Market

Giant Taj Mahal Can’t Hide Weakness of Dubai’s Property Market
Link Global Group said it will build the Taj Arabia complex that includes a 300 room hotel in a replica of the 17th century Indian palace that's four times as big as the original. Source: Falcnocity of Wonders via Bloomberg

Dubai proclaimed its real estate comeback in the only style it knows: grandiose.

A replica of the Taj Mahal about four times bigger than the original, a skyscraper with nine swimming pools and a mile-long canal winding its way around office buildings are among the high-profile projects unveiled in the past few weeks. The plans had been on hold since the financial crisis brought the emirate’s property boom to a halt in 2008.

The eye-catching developments may be creating a buzz. In reality, the nascent recovery has been limited to a few areas of Dubai, which suffered a slump that caused property values across the emirate to fall by as much as 65 percent. About a quarter of Dubai’s residential properties are empty and an additional 25,000 are due to be completed next year as developers fulfill contracts awarded before the crash, Jones Lang LaSalle Inc. estimates.

“The market has improved to some extent, but there isn’t enough to justify going ahead with all the projects that are now being talked about,” said Craig Plumb, head of research for the Middle East at the Chicago-based property broker. “They should be phased over a longer period and should be built in line with demand.”

About a third of the office space in Dubai’s central business district is unoccupied and the vacancy rate is much higher in other neighborhoods, Jones Lang said. About 900,000 square meters (9.7 million square feet) will be added in 2013, according to the firm. That’s 13 percent of the existing space.

Mega Projects

Some of the developments announced earlier this month at Cityscape Global, Dubai’s biggest annual property conference, were reminiscent of pre-crash projects like Burj Khalifa, the world’s tallest tower, and an indoor ski slope at the Mall of the Emirates.

Meydan City Corp., the company that built Dubai’s 60,000-seat horseracing stadium and hotel complex, said at Cityscape that it will revive a plan to create a development featuring lagoons, canals and parks as well as a skyscraper with pools and “sky gardens.” The government also approved the construction of a canal that would connect the Business Bay area to the sea.

The Taj Arabia complex, based on India’s 17th-century Taj Mahal mausoleum, will be built by Link Global Ltd. for about 1.3 billion dirhams ($350 million), the Dubai-based company said at the three-day trade fair. Chairman Arun Mehra declined to say how Link Global will finance the construction of the Taj Arabia, which will include a 300-room luxury hotel.

Abandoned Plans

As those projects get a new lease of life, many more sit abandoned in the desert or in the Persian Gulf.

Taj Arabia was designed to be part of the Falconcity of Wonders, a 41 million-square-foot complex of homes, offices, hotels and stores along the Emirates Ring Road that links Dubai to the United Arab Emirates’ six other sheikdoms. That project, featuring attractions including replicas of the Pyramids, the Great Wall of China, the Eiffel tower and the leaning tower of Pisa, was derailed by the collapse of the real estate market.

Salem Al Moosa, chairman of the Falconcity project, said underground work including electricity, water and sewage infrastructure has been completed and the company has sold parts of the site to developers that will realize the company’s plans.

Of the three palm-shaped artificial islands planned by Nakheel PJSC, only one -- the Palm Jumeirah -- has been developed, with a combination of hotels and residences. The World, a chain of islands off Dubai’s coast that look like a world map, was created by Nakheel in 2008, though the archipelago has yet to be developed. No one at the company was available to comment on the project.

Dubailand Project

In all, about $757 billion of projects were delayed or aborted in the U.A.E. since the collapse of Lehman Brothers International Inc. in 2008 sparked the global financial crisis, Citigroup said in a report Oct. 16. That’s more than the projects that were canceled in Egypt, Iraq, Kuwait, Saudi Arabia and Qatar combined, Citigroup said.

Dubailand, an entertainment complex designed to be three times the size of Manhattan, is another project that was put on hold. Dubai Properties Group didn’t respond to questions seeking comment on the project.

Dubai’s real estate market is showing some signs of recovery after almost four years of falling prices. The number of property transactions jumped by 50 percent in the first half of 2012 compared with a year earlier, data from Dubai’s Land Department show. The purchases, valued at 12 billion dirhams, are still 74 percent less than the 46.5 billion dirhams of sales in the first half of 2008. The Land Department doesn’t break down its data into different types of real estate.

Gyms, Pools

So far, most of the growth has been along Sheikh Zayed Road, the longest in the U.A.E., where facilities such as gyms, pools and landscaped areas have been completed. The biggest beneficiary has been Emaar Properties PJSC, whose developments include the downtown area around its Burj Khalifa tower, the world’s tallest building, and collections of prime single-family homes known as villa communities such as Arabian Ranches.

Emirates Hills, another villa development, as well as Downtown and Dubai Marina accounted for most of this year’s property deals, data provided by Dubai’s Land Department show.

The improving demand “isn’t sustainable without steady population growth and job creation in addition to a financing pick-up,” said Saud Masud, chief executive officer of SM Advisory Group LLC, a New York-based investment firm. “The oversupply issue will probably not be resolved for perhaps another decade, but pockets of price stability may remain.”

Limited Options

Most of the demand is coming from India, Pakistan and Iran, where concern about the European crisis left investors with few alternatives, said Jan Pawel Hasman, an analyst at EFG-Hermes Holding SAE in Cairo. “The question is: how sustainable is it?” he said.

Other buyers are looking for a haven from the political turmoil that toppled leaders in Tunisia, Egypt and Yemen, Hasman said.

Prices of residential properties in the best locations, such as the downtown area and the marina, have risen about 15 percent this year. Villas, which account for about 20 percent of the homes on the market, are in higher demand than other type of residences, said Amer Khan, a fund manager at the asset-management division of Shuaa Capital PSC.

Selective Demand

“This demand is very different from what we saw four years ago,” Khan said. “This time it’s a lot more selective.”

Emaar, which sold more than 500 serviced apartments in a tower near Burj Khalifa last month, required buyers to pay 20 percent of the value before taking legal ownership.

“New regulations in Dubai after the real estate boom are aimed at limiting speculation and Emaar’s move was in line with this,” Hasman said. “Rules concerning escrow accounts and management of project cash flows by developers could help prevent the creation of another real estate bubble.”

Emaar is one of the few developers in Dubai that is able to sell properties before they’re built, a model that dominated the market before the 2008 crash. The company had comparatively few uncompleted projects at that time and has since been finishing them. That isn’t the case for most of Dubai’s developers. Many shifted buyers from suspended projects to ones closer to completion. Others continue to hold on to cash paid by clients as developments remain half built and court disputes drag on.

The focus on projects where demand is increasing can be misleading, Plumb of Jones Lang said. As developers complete facilities in projects considered undesirable now, demand can shift and affect prices across Dubai, he said.

“It’s not possible to discount parts of the market as all locations are interrelated and there will eventually be a trickling up or down in demand and prices between different areas,” he said.

Debt Burden

Dubai’s default risk has dropped over the past three years as debt restructuring, bond repayments and rising corporate profits boost confidence in its economic rebound. Still, the emirate is weighed down by the $113 billion of debt it racked up transforming itself into a tourism and commercial hub.

About $15 billion of the debt matures this year, the International Monetary Fund estimated in June. Abu Dhabi’s government and two of its banks as well as the U.A.E.’s central bank provided $20 billion to Dubai in 2009 to help state-owned companies restructure debt.

Dubai’s property market had one of the world’s biggest reversals following the global credit crisis in 2008. Nakheel wrote down the value of its real estate by $21 billion from late 2008 through mid-2010 and received an $8.6 billion bailout from Dubai’s government, helping the company to avoid default after cutting jobs and halted projects.

Emaar Disappoints

Union Properties PJSC, another Dubai developer, reported losses for 10 out of 15 quarters since Sept. 2008, while Limitless LLC, a government-owned property company, put on hold all its projects including ones in Saudi Arabia and Russia.

Emaar hasn’t escaped the crisis either. Yesterday, the company said third-quarter earnings dropped 4.7 percent, missing analysts’ estimates, after revenue declined.

A shortage of development finance may end up saving Dubai real estate from the exuberance of developers. In January, Nakheel announced plans for The Pointe at Palm Jumeirah, a retail development that would be its first new project on the island since the company bailed out in 2009. At the time, Nakheel said it was in talks with banks to raise at least 300 million dirhams ($82 million) for the project. No loan agreement has since been announced. Financing for the project is in progress, the company said by e-mail last week.

‘Cautious Lenders’

“Funding for many of these projects will be very difficult and may never come,” Jones Lang’s Plumb said. “People are still wary and that will probably reduce the level of actual completions, which is a positive for the overall market.”

Lending to developers reached 102 billion dirhams by the end of the first quarter, a 3 percent increase from the same period last year, said Shabbir Malik, a Dubai-based analyst at EFG-Hermes Holding SAE.

“That’s very weak and shows that lenders remain cautious,” Malik said. “They want to ensure borrowers can repay and they don’t seem to buy into the cash flows claimed by developers.”

Regulations on liquidity that will go into effect next year are also likely to hinder lending, he said. The U.A.E. central bank said April 4 that banks must not lend more than 100 percent of their capital to local governments and the same amount to government-related entities to help reduce risk. There was no limit under previous rules.

As emerging-market economies from China to Brazil slow, the property market faces a risk from the third major brake on expansion in five years.

“While a global recovery may add liquidity and in theory support prices, there is still a significant risk in the region, which may negatively impact direct investment,” Masud said.

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