City bonuses create new London hotspots

Cash-ready buyers are ready to put a chunk of the estimated £8.8 billion City bonuses into the London housing market, according to haart estate agents. As a result, there is expected to be vastly increased demand for large family homes priced over £800,000 and high-spec one- to two-bedroom flats.

haart has recorded a 25 per cent increase in registered buyers in the prime areas of London, where City workers are primed to spend their windfall. Prestigious family properties in the capital are in high demand and as a result prices for family homes are set to continue to soar in locations such as Bedford Park in Chiswick, the Peterborough Estate in Fulham and‘Between the Commons’ in Clapham. Canary Wharf will also see increased market action, as its location combined with its ready supply of high-end, low-maintenance apartments in exclusive developments such as Pan Peninsula, are just what the banker ordered.

The Olympic Village area is also set to soar, with the Icona development, due for completion in 2008, emerging as the area’s most sought-after investment opportunity.

Russell Jervis, managing director of haart estate agents, says, ‘There has already been a higher than usual number of buyers registered for this time of year as a result of the expected bonus bonanza. City bonuses have commonly been invested in bricks and mortar and we expect it to be no different this year. However, the flood of extra money will have a direct impact on the value of properties, particularly the properties ideal for buy-to-let investment, which command high rental yields, and grand family homes.’

Beware of realty prices that are too good to be true!

The sudden wave of cut-price off-plan real estate sales in Dubai should set alarm bells ringing. Have developers suddenly found a way to build a cheaper product to meet customer demand, or are they desperately trying to pull in the last punters because they are getting short of cash?

In business survival is the key when a market begins to weaken, and keeping the cash flow machine pumping out the necessary liquidity to stay afloat is absolutely essential.

Therefore, when advertisements start to appear offering the most amazingly low priced deals on apartments you have to wonder what is going on. Younger colleagues might instantly jump to attention and ask whether this is their chance to get on board the great Dubai real estate boom.

But we have to go back to basics. Who is doing the selling? Is this a Dubai Government backed entity? Or is this a private sector developer which already has a number of projects in progress, if not actually under construction?

Delivery dates
If you are talking about the second category, or even the first in some cases, you need to ask yourself, when will this project actually be delivered? There is also a supplementary question for a private developer: will it ever actually be delivered?

For in real estate corrections around the world the biggest losers are people who invest their money with developers which go bankrupt. It is a worldwide phenomenon and just a fact of business life that has not been seen in Dubai yet because the freehold market is so new.

For it is not only buyers of off-plan property who take a risk, the biggest risks are borne by the developers themselves. They take the decision to go ahead with a project and fund it.

They also get the market badly wrong on occasions and proceed with developments when they ought to be cutting back their operations, or seeking to sell out to another developer. But that is when their clients are also at the biggest risk, as they may go down together.

Buyer beware
How much money do clients get back when a developer goes bankrupt? In most markets there is a legal procedure and it takes years to complete and the pay out is only a fraction of the original investment. So take care about buying a bargain that might turn out to be a tragic mistake.

Look at this situation another way: Dubai construction costs have been soaring over the past few years. How can developers possibly turn around and offer cheap prices on apartments now? They might well cost more to build than they are selling them for.

So why are they doing it? Cash flow is the only logical answer, and buyers should beware.

Could Dubai prices ever reach Hong Kong levels?

The gap between house prices in Hong Kong and Dubai has narrowed. But the Chinese city still boasts some of the most expensive real estate in the world, costing up to three times more than comparable Dubai property. And yet income and wealth in Hong Kong is not so different from Dubai these days.

Last week AME Info sat down with David Faulkner, regional director of Colliers International in Hong Kong to ask him about the parallels between the two cities. A veteran of numerous property market booms and busts around the world, he has spent a lot of time in Dubai recently advising clients.

'Hong Kong has a monopoly land owner, the government, and all private ownership is leasehold,' he said. 'Real estate has become a big source of government revenue with land often costing 60-70 per cent of development cost.

'The system also works very well for the home buyers. People here have high incomes with low rates of income tax and invest in property as a store of value.

'This has allowed residential rental yields to fall to two to three per cent, as investors are really interested in the future capital increase and not the rental income.'

Rental comparison
The last point explains why home rental levels in Hong Kong are not so far out of line with Dubai, and yet house prices are very much higher.

Mr. Faulkner first remark also notes how important the real estate sector is to the Hong Kong government as a source of income, and that could also be said of Dubai these days.

In the same interview Mr Faulkner explained how the newly independent government of Hong Kong had made a mistake in 1997 of wanting to cool a booming housing market by boosting supply, which unfortunately coincided with the Asian Financial Crisis and then the dot-com crash.

'By 2002 the government realized that this supply was not a good thing and began cutting back, and in 2003 the government stepped out of housing for sale and allowed the private sector to cut supply right back.'

This was compounded by the SARS health crisis but the market bottomed out in 2003, with prices an incredible 70 per cent lower than the peak. There were actually very few real estate sales at this level and the banks rallied around to help mortgage payers and developers over the crisis.

Recovery dawns
Over the next 18 months prices doubled. And prices in the luxury end of the market are back at 1997 levels, although cheaper property is still selling for less. Thus a combination of government market control and market forces has restored the Hong Kong real estate market to its former status as among the most expensive in the world.

Could the Dubai Government learn from this experience? It too has tremendous control over the local market, and could pull supply levels back in a downturn if required. It might choose to act more quickly than in Hong Kong where the government hesitated for too long.

However, Hong Kong business is already complaining about the surge in accommodation costs and threatening relocation. So creating a paradise for real estate investment has to be balanced against the needs for competitive real estate rental levels.

On that reckoning it may not be a bad thing for Dubai if housing stays nearer to current valuation levels.

But the Hong Kong experience does suggest that a trading hub can sustain house price levels higher than the present status quo in the newly created Dubai market. And in particular rental yields could fall as the market matures, supporting higher property valuations but most probably not until after a market correction.

Why Dubai condos are not like Miami and will avoid a real crisis

The overbuilding of Miami condominium buildings is worrying realtors. They point to 10,000 completions this year and 10,000 next year, while only 11,000 units were absorbed by the market in the previous decade. Importantly the developers are highly leveraged and so are the off plan buyers of many of these units.

At a superficial level there is a comparison with Dubai. One private building materials group has its own estimate that suggests 50,000 units will be completed this year and 50,000 next year, with around half of these units bought by wealthy people as second homes, usually without finance.

The annual take-up of apartments in Dubai is a matter for some debate among analysts. But estimates range from 10-30,000 apartments. Thus the most optimistic analysts see this bulge in completions being very quickly absorbed, and the more pessimistic see a couple of years of oversupply.

Pessimists are more concerned about the leveraging of off plan units, although the figures from Dubai mortgage providers suggest that no more than 15,000 off plan apartments have been bought using finance, and that means that 85 per cent are bought with cash.

Defaults possible
In theory if apartments fell sharply in value then those borrowers who had not actually paid down much more than the deposit, which can be as low as four per cent, could be tempted to hand the keys back to their lender and default.

But the potential for such bad loans is clearly on a far smaller scale than in the US where borrowing is almost universal for real estate while in Dubai such leverage is in its infancy and at low levels. Repossessions could therefore depress the Dubai market for a short while but would not leave it seriously undermined.

Indeed, the amount of equity investment in Dubai real estate is one reason to believe it will ride-out the predicted correction period next year in much better shape than the more advanced markets like Miami. For Miami has less apartments under construction but considerably more real estate leverage wrapped up in this process.

1999 precedent
In the 1999 real estate downturn in Dubai, which followed a local stock market crash and the Asian Financial Crisis, many observers were amazed at the resilience of the sector which at the time again looked to be overbuilding.

What happened was that property owners were not greatly leveraged and just sat out the downturn, even leaving buildings empty rather than cut their rentals.

It could be different this time. But as in 1999 the biggest player in the Dubai market is the Dubai Government, so expect a case of deja vu all over again.

Also it should be noted that the capacity of a dynamic emerging economy like Dubai to absorb spare residential capacity is a lot stronger than a mature economy like Florida which may have similar levels of sunshine and tourism but that is where the comparison ends.

Sure a few fringe developers may decide to axe over ambitious projects, and some might collapse. And that will be the correction, not a massive collapse of real estate prices or a major crisis. Without the leverage it just will not happen, and bargain hunters might have to wait for another future crisis when real estate borrowing forces prices too high to be sustainable.