How Dubai’s property bubble burst – and is China next?

Wednesday, September 22, 2010 | Posted by: Fiona Cullinan
Categories: China | Tags: finance, investment, property, China, economic, market, Brazil, Dubai, crash, bubble, boom

High property prices, property tightening policies and the start of declining prices indicate a teetering property market in China, one that the Chinese government is trying to let the steam out of gently. Here Nick Huber tells the story of how the Dubai property bubble burst in 2009, as a hedge fund manager warns that China could be 1,000 times worse.

In September 2008 Lehman Brothers collapsed, sparking fears of a global financial meltdown. Shares fell worldwide and fear spread through financial markets after the sudden demise of the venerable US investment bank. Central banks pumped billions of pounds into money markets in a desperate attempt to stop more big institutions going under.

But if the writing was on the wall for most economies and their booming property markets, no one seemed to tell Dubai.

Less than a month after the collapse of Lehman Brothers, Dubai held Cityscape Dubai 2008, one of the world’s largest property investment conferences.

Boris Becker, the former world number one tennis player, unveiled plans for a Boris Becker Beach Resort & Tennis Academy. At the same conference, Sarah Ferguson, the Duchess of York, launched a 32-storey luxury ‘Manhattan style complex’ in the Dubai Marina.

The Dubai property market, where property prices once rose by around 80% in a single year, was one of the world’s fastest-growing and exuberant property markets. Only 30 years ago, the emirate of Dubai was mainly sand, an obscure fishing village and port.

The property boom began in 2002, when the government issued a law legalising foreign ownership of properties in select areas of the city.

Dean Foley, international sales manager at property company Hamptons International, says: “When the new laws were passed you could pick up property in Dubai for no money at all – £20-30,000 would have got you a one-bedroom project, for example, around the marina. Everything was new at that point.”

Property prices began to soar between 2006 and 2008, rising by 20-30% in the most expensive areas.

“Property prices were astronomically high,” Foley says. “A lot of people were flipping properties. They were exchanging contracts and selling them on the next day for 15-20% profits. A lot of the corporations we see now in Dubai are a direct result of a builder putting up his house and selling it within hours of its launch and then having the ability and the cash flow to do more and more.”

There was massive investment in property and infrastructure, part of a drive by the ruler of Dubai, Sheikh Mohammed, to transform Dubai into a regional economic powerhouse.

Dubai had become a popular tourist destination. British investors, including many celebrities, flocked to Dubai, attracted by the sun and the potential to get rich quick by buying off-plan or new-build properties.

Property developments like the Palm Jumeirah – an artificial island fanning out into the Persian Gulf, or the Waterfront, a city twice the size of Hong Kong Island, designed to house 1.5 million people – symbolised Dubai’s vaulting ambitions. Critics said Dubai was tacky, but the money kept on flowing in.

The Dubai skyline became dotted with cranes and skyscrapers.

The bubble burst in late 2009 after Dubai World, a government-owned conglomerate behind the emirate’s massive property expansion, asked creditors for a six-month ‘standstill’ on its debt repayments.

News of the P&O owner’s request shocked investors and financial markets. The Dubai property market was already struggling; prices fell 47% in the year to September 2009, according to property agent Knight Frank.

The announcement by Dubai World accelerated the fall in prices. Construction slowed or ground to a halt, leaving some investors that had paid deposits for off-plan schemes out of pocket.

“I remember getting this “save yourselves now” email from a journalist friend of mine around the time of the Lehman Brothers collapse, but up until then the city felt completely immune,” says Stephen Worsley, a communications consultant and UK expat who lives in Dubai.

“At Cityscape 2008, a month later, the real estate industry was still acting as though nothing had happened and that Dubai was somehow sealed off from the rest of the global economy. It was ridiculous thinking about it now.

“Then everything fell off a cliff.

“It was really quite dramatic. The economy appeared to just freeze.”

Property experts say that Dubai had all the warning signs of property bubbles – cheap finance; a high percentage of investors buying property off-plan (about 80-90% of buyers in Dubai were property investors, compared to about 10-20% in the UK); soaring prices and the confidence that prices will carry on rising.

“Investors were selling onto investors, which is never a good sign,” says Stuart Law, the chief executive and founder of property advisor Assetz. “Sometimes a property unit contract was changing hands five times in a year. It didn’t look good.”

Property investors can learn to spot likely property bubbles by following some simple rules (see previous post), but where is the next big property bubble?

Some heavyweight investors warn that the Chinese property market is creating a bubble of staggering dimensions.

China has bucked the global recession of the past two years and remained the fastest-growing major economy. Property prices are rising fast. Official figures showed that in December property prices in China rose 7.8%, the fastest pace in 18 months, although prices in some regions are reported to be leaping 20% a month.

Worryingly, vacancy rates for commercial office space are high, creating millions of square feet of zombie space. Some experts reckon about half of Beijing’s commercial space is vacant.

“Dubai times 1,000 – or worse,” was the verdict on China by Jim Chanos, the short-selling hedge fund manager who was among the first to predict the demise of Enron.

Marc Faber, publisher of the Gloom, Boom & Doom Report, also reckons that China is overdoing it. “It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity,” Faber told Bloomberg Television in February. “I think the Chinese economy will decelerate very substantially in 2010 and could even crash.”

Like Dubai, China has some surreal developments.

In the suburbs of Huairou, outside Beijing, for example, there is an alpine village, complete with a 200ft clock tower rising incongruously above the industrial suburbs. China is still overwhelmingly a domestic property market and although some of its coastal towns are slightly easier to invest in for foreign buyers, it may still be too risky for many private UK property investors.

For those who fancy a punt, some experts recommend Brazil. But don’t discount Dubai for too long. Hampton’s Foley says it has seen increased activity in the Dubai ‘second-hand’ property market.

Image of Dubai skyline: © Pyb. Words: Nick Huber. This article originally appeared in Elevate magazine for business leaders, which is available for download.

You might also like:
* How to spot a property bubble

* How to minimise tax in a property downturn

* What does China have to offer UK-based or other overseas investors?