Saturday, May 22, 2010

Dubai Begins to De-Register Defaulting Property Owners


The National reports.

If the percentage is anywhere near the 20% mentioned and these properties are put on the market via auction, it's not going to be helpful.

First, it's going to cause existing investors and developers to crystallize their losses.  That in itself is not a bad thing.  When you make a bad investment or business decision, it's best to recognize it and move on.

But will this salutary and necessary step lead to negative reactions?

What will be the impact impact property values - both in those developments and others? 
  1. Will other investors in other properties at less than the 80% threshold decide that it will be cheaper to buy at auction than to make the payments on their existing contracts?  
  2. If they do, what will happen to developers' ability to finish their projects?  Or on the quality of the completion work?
  3. What will lenders do if there is a significant erosion in collateral values?
  4. How will borrowers' react?
A lot more shoes have to drop before stability is reached in the market.  And how hard they drop will affect the path and the pace of the recovery.

5 comments:

the real nick said...

It's a good thing, unless you are a "owner".
The current values achived at auction may be ever so slightly above the original investment. This may enable developers to complete projects by cutting their losses and claw back a few quid, however few.
Once projects are completed there will be at least some chips on the table. Right now the deck is sealed and noone plays because the lack of funds/ payments stalled so many projects mid way.

"Owners" who speculated on rising values took a more or less calculated risk. They lost. I have no sympathy for them. I have sympathy for the Dubai property market, and repossessions are a way out of the mire, albeit into a new shallower mire, but so on and out eventually...

Abu 'Arqala said...

TRN

Thanks for your as usual good comments.

I agree with you that it's a necessary step.

So I'm not arguing that the decks shouldn't be cleared or to use your metaphor opened.

I was just wondering/postulating that this step might cause some more pain. Useful pain as it would lead to recovery - but nonetheless pain.

So I understand your argument better can you clarify a couple of points?

First, what do you mean by "original investment"? Is that the amount paid to date by the "owner"? As compared to the contractual price to buy the entire unit?

Second, if a lot of units are auctioned, do you see a significant price move from current levels? And if so, is this a temporary phenomenon or something more lasting?

Thanks

the real nick said...

AA,

I agree, it must be painful to lose an investment. The people who will feel most pain are the small investors and speculators who got stuck, not so much the large investors, and not the developers either.

By 'original investment' I meant the developers' investment starting with set up costs, land purchase, oncosts such registration, design + legal + marketing fees, and cost of construction to date, plus cost of money and discounted for three years. Shooting from the hip I'd say the original investment would therefore be around 800 to 1,200 Dhs / sqft GFA (gross floor area, or sellable area). An auction would probably get you that much back. That means a developer may be back to square 1; That's a loss of course, but a fresh start nonetheless...

The 'repossessed' investors (repossessees ?) will never get their original investment back. Not today. That's why they are stuck in the first place, or else why wouldn't they simply sell on and get out. They can't. They are either clinging on to their investment or are in deep negative equity. No one is buying some unfinished property except at auctions.

Which leads me to your second question. I don't think auctions of repossessed properties will have a big impact on the general market rates. Why, because the only people still buying, especially bulk for cash at auctions, are wealthy locals, GCC individuals and Russkis looking for bargains. These people won't offload these bargains on the open market immediately but put on the slow burner: Rent them out for a few years, wait for the market to recover. Low rents don't mean collapse or freeze of the market. They just mean long returns on investment. Ten or fifteen year plans, instead of ten weeks...
It's a different game altogether, but at least it gets going.

Abu 'Arqala said...

TRN

Thanks.

You've helped me understand the situation much better.

the real nick said...

AA,

Take it from me with a pinch of salt. If I was a guy who really knew what's really going on and where we're heading I'd be sitting pretty on a beach in Mauritius by now and wouldn't have to sell myself in Dubai...

I'm guessing, like everybody else.