Dubai: A Cataclysmic Disaster Waiting to Happen

Dubai's hyperinflated real estate market is about to implode or blow up in the faces of speculators. Sales are collapsing and the global downturn in the UAE, whose currency is linked to the US dollar, is going to be a reluctant victim of a cataclysmic disaster.

Desperate sellers are now selling off their pre-booking investments at zero premium. Commissions of agents are down up to 70 percent, and six months may be just about the time that investors may have to bail out of risky real estate investments.

Real estate companies like Emaar have seen their value erode 62 percent since the beginning of the year, and the Dubai Financial markets, which is the barometer of the financial health of the country has slumped 48 percent. Colliers International earlier revealed growth of property prices in Dubai slowed to 16 percent in the second quarter of 2008 from 42 percent in the first quarter. Morgan Stanley warned in August that property hotspot Dubai could see a 10 percent fall in prices by 2010. Perhaps this was an understatement.

What makes Dubai vulnerable is that it has zilch oil, and it had charted itself a course of becoming a property and construction hub for the entire Middle East. Dubai was expecting foreigners to come in and buy up apartments and commercial space, but for a country that depends 30% on construction economy is now on a verge of a cataclysmic disaster.

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Real Estate Developers Ready to Start Price War

The daggers could be out soon, as massive loans taken from market players may start to burn holes in real estate developers balance sheets if the properties are not sold soon.

The cartel for real estate players who have been holding up rates for the last six months may soon get in to desperate mode. Real estate developers are bracing themselves for a 50% cut in their property rates. This despite the fact that real estate prices in India have fallen 20-25% over the last seven months. Industry experts at a recent TiE-Indian Angel Network summit held in New Delhi agree that further price cuts are in the offing.

Kashi Nath Group's CEO Sanjay Khanna clearly admits that those who do not reduce prices now will be forced to do this some time or the other. Ask Ashish Mathur, head of business development and marketing for Mahindra World City, who gave a resounding "yes" when asked if a 30% cut can be expected in realty prices.

Santhosh Kumar, deputy CEO of Jones Lang LaSalle Meghraj, says that a 30-50% discounts are available even now, if one is willing to pay cash down.

In the case of residential property, the rate of interest on home loans has gone up from around 7.75 percent in 2004 to around 12.75 percent now. Almost 90 percent of home buyers take the home loan route. For a person taking a home loan, the rate of interest has increased 5 percent in the last four years. If a person borrowed a lakh for 20 years at 7.75 percent in 2004, he would have to pay around Rs 96 thousand as interest eventually. At the present rates, the interest rate burden has now increased to more than Rs 2 lakh on the same amount.

The liquidity crunch has been fueled by expensive home loans, a slowing Indian economy and the global financial crises. Banks too have become reluctant to lend to the realty segment. The ing economy has had a direct impact on commercial property market. During the quarter ended September 30, commercial space demand has slowed down in all major metros, with low leasing demand in the first two quarters of the year.

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Navi Mumbai's Palm Beach Road prices slump 50%

It would be overkill to write about the fall of the real estate market which we have been tracking here since we gave a call that in February 2008, the realty market in India had made a top. It still took some time for an official confirmation of the crash in real estate prices, but today the Times of India (Mumbai) confirmed that the famous Palm Beach Road in Vashi has seen an almost 50% crash in real estate apartment prices.

For starters, this is just the beginning. Builders are willing to sell swiftly without any fuss. While a few months ago, home buyers were willing to invest by putting down payments even before the plinth was raised, today no one is ready to even consider a ready apartment.

Previously touted as the Marine Drive of Vashi, the 9 km Palm Beach Road, was becoming a upscale real estate stretch between Vashi and Belapur. Today, plauged by zero-sales and a crashing stock market, in which real estate stocks have fallen more than 90% of their high values, On paper, residential sales are still sitting pretty at Rs 7,500 to Rs 9,000 per square foot, but with near-zero sales and a volatile market, panicky developers and regretful investors are selling for as low as Rs 4,500.

Navin Makhija is a director with the Wadhwa Group, which is stuck with the biggest project—six towers of 25 floors each on Palm Beach Road. He tangentially acknowledges the slump in rates. "In these days when the global market is bad, sales are down and so is sentiment. It's natural that some will offer lower rates to sell houses," he says.

Makhija adds that for their Palm Beach Residency project, prices have been "internally lowered to Rs 7,000 to 8,000 psf. We are not going to make any sales for the next one-and-a-half months, but hopefully things will pick up", he says.

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