Tuesday, November 25, 2008

The Mullahs Have Landed - in Dubai

Dubai is soon headed for a crisis of such huge proportions that its expatriate population has never seen ever.

A double whammy of weak crude prices - down from $150 to $50 a barrel - and a weaker US currency - petrodollars - will make its ruling Executive council scour high and low for ideas on how to fund the highly leveraged property market balloon it has created and what to make of asset depreciation. In many ways, the government has got caught in a whirlpool of its own making.

For expatriates, especially those who made laughable investments believing that Las Vegas could be created around the fringes of Islamic fundamentalism, this could be the wake-up call for a long dreary nuclear winter.

With the pain starting to ride down the nerve to common people, Dubai's success and any impending failure would get straightaway tied to the non-Islamic indulgences of the place. Financial pain gives rise to conservatism and religious extremism. With Dubai sandwiched between Shia Iran and Sunni Saudi Arabia, it could get caught in any crossfire.

The role of Dubai has never been understood; why is Dubai so powerful within the Emirates - even though it has no oil, no manufacturing base, nor has it been able to achieve Singapore's status as a port of repute. Yet, it has been able to hold up to Abu Dhabi, which owns 90 percent of the UAE's oil, and whose rulers, although more powerful, are far more low profile.

One reason that comes to mind is that Dubai is a refiner for Iran's oil, and a lot of refining margins are tied to the price of oil, which means the last four years were a bonanza for Dubai. This perhaps explains its clout. With clout, comes ambition, and with ambition a penchant for breaking rules, and Dubai has had all of it. In fact its direction toward becoming a tourism hub for Middle East revelers has always been watched closely by the Islamic right.

Dubai has no choice, because tourism in desert cannot takeoff without prostitution, alcohol or gambling. There is always talk about how activities in Dubai are frowned upon by the conservative Islamic countries. Some time in 2005 there was a rumor of some threats by Islamic extremists to bomb City Center, a shopping mall in Dubai, all of which was well-handled and overcome without alarm. Clearly, it had become evident even then that Dubai's success was getting increasingly uncomfortable for some, and sooner or later there was bound to be trouble.

However, before Islamic conservatism could get it, the credit crisis from the West got its goat. As much as charging interest is haram (sin) in Islam, this did not stop the mortgage on construction from becoming the fuel for Dubai's real estate bubble, as it goaded the desire of millions of expats of owning castles in the sand.

With bright ideas and some really grandiose schemes indeed being delivered, it was western money, and speculation drove up the market in Dubai. There was a time in 2007, when financial executives from New York, speculated on villas in Jumeirah, booking a villa one week, and selling it out the next for a profit. It was this false sense of a bullish market that encouraged lesser mortals among the expatriates to participate in the orgy. Until of course, it all blew up last week in their faces.

Finally, as the sand settles, people will begin to see Dubai what it it really is - a city of imagination but very little lastability: without natural resources, like water and fertile soul, and no oil, it looks like this time the devil has come to stay.

Without the sins of the West - alcohol, prostitution, gambling - Dubai would have certainly found it a challenge to sustain its tourism story. Now, as the hype of the glamor and glitz, gets replaced by caution and conservatism, the Mullahs are now going to have all the time to take a hard look at what Dubai represents, and see how it fits in to the general laws of Shariah. With Dubai now having to increasingly depend on Abu Dhabi and Saudi money, the Mullahs have surely landed.





Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book

everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror


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