Emirate Real Estate - Saudi Investors' Perspective

Today AlRiyadh published interviews with two Saudi investors in the UAE real estate market: Muhammad Bin Husayn AlNimr, Marketing Manager of Awali Real Estate (described as one of the largest Saudi companies investing in real estate in the UAE) and Muhammad AlJarbu', a major investor in Dubai real estate.

The article leads off by noting that Saudis have invested approximately SAR100 billion (US$26.7 billion) in UAE real estate.

Here are highlights from AlNimr's interview:

1. In summary, he thinks rather than massive losses, Saudi investors will see much lower profits.  He estimates it will take five years for prices to recover to their previous high levels.
2. The main problem Saudi companies face is purchasers paying the installments  for the units they have bought.  Their own repayment of bank debt or access to bank credit is a much lesser issue.
   
3. Payments are not being made for two basic reasons.  Either the individual can't pay.  Or has decided that with the fall in real estate prices it's better to walk away.  The loss of the installments already made is outweighed by paying the old market price for a much depreciated asset.
4. Sales levels have fallen by approximately 75% from a year ago.  So it is difficult to find new buyers for property as it comes on stream.  And perhaps more importantly to buy the defaulted units.
5. Many of the buyers purchases were financed with loans secured by their salaries (AA:  A typical bank "security package" for personal loans in the region - though not as typical as before.  The borrower agrees to have his salary deposited at the lender who then deducts the monthly debt service payment).  
6. As a result, lenders face difficult choices when employees lose their jobs.  What he describes as the difficulty facing US banks.  Take the property in satisfaction of the loan, but watch it decline in value with eventual sales below the capital of the loan.  He describes as a "vortex or whirlpool" of losses.  (AA:  How developers are not going to be sucked into the vortex is hard to imagine.)
   
7. He also notes that banks have stopped "name lending" to projects.  (AA: That is lending on the reputation of the borrower - project developer in this case - without too much focus on the economic fundamentals of the project a la Saad and AlGosaibi).
8. Banks have not yet begun seizing real estate projects but have slowed or stopped additional lending to them.  His belief is that they will only do this when the distress is abundantly clear.  (AA: Remember this is a developer/real estate company spokesman and not a banker.  A key characteristic of a real estate developer is optimism).
9. This is temporary crisis which he expects to end soon.  A bit of rescheduling of loan repayments will  set everything right.  (AA: Remember this is a real estate developer speaking.  Think of "The Donald" and you'll have an insight).
   
10. Finally he ascribes the problem to Dubai's excessive use of short term debt.  He believes that if they had used longer term financing no crisis would have occurred.  (AA: The Donald mentality again.  Apparently, he sees little reason that real estate prices need to be anchored to economic reality).

Muhammad AlJarbu' (described as having special expertise in Dubai):

1. A decline of between 35 to 40% in the price leased properties in Dubai.  Elsewhere in the Emirates about 50%.
2. Almost a standstill (rukud) in the sales of units - down 75% from the prior year.
3. Only two nationalities are active - based on their faith that this is a temporary problem.
   
4. Saudi investors are hunting for bargains.
5. Most nationalities not buying save for the Russians.

In addition to the insights these interviews provide, there are two other points worthy of note:

1. The potential for an additional wave of credit and economic distress as the buyers of properties default.  Previously booked sales and profits may need to be reversed.  Banks and other lenders may face a tsunami of bad loans.
   
2. The reality that the problem is not only a problem for Dubai Inc -the Dubai Government  and its independent commercial companies - but that other parties are going to feel real pain.  Developers,   end unit buyers, the banks who financed both as well as contractors, building materials suppliers, and household furnishings retailers.  And those who work for them or supply them various ancillary services.  Simultaneously, a proof of the validity of the Chicago School "price theory" as well as refutation as the market price seems to have been wrong for a prolonged period and sent highly distorting signals - the wreckage of which will have to be picked up for some time.