Monday, November 30, 2009

Murphy's law is at work in the global financial and realty markets. If something can go wrong, it will. No one who is familiar with the facts of Dubai's boom and its global dimension ought to have been surprised by the debt crisis that has hit Dubai World.

For the last one year, there have been far too many stories coming out of the region on real and potential bankruptcies, plans being shelved, excess capacity and inadequate demand.

The global financial crisis and the rollback in oil prices in 2008 were largely responsible for this. However, for the same reason, the moderation of the global slowdown and the recent rise in oil prices have helped improve sentiment in the region.

Lack of transparency, poor management of a financial problem and the long weekend seem to have done more to spook the markets than the real size of the problem itself.

Nevertheless, it is better to be forewarned and to hedge one's bets about hot spots like Dubai till the global economy is back on an even keel.

The government of Abu Dhabi has already stepped in with some reassuring remarks, even if these do not fully ease the situation for Dubai.

Informed analysts suggest that Dubai World has the capability to handle a large part of the problem it faces, given the better economics of its other subsidiaries like Dubai Port World.

It is the property subsidiary, Nakheel, that has taken the hit from the near 50 per cent fall in property prices in Dubai. State-controlled economies like China can absorb the shock of excess capacity in real estate better than a more market-dependent economy like Dubai.

As for India , the central bank and the finance ministry have made reassuring statements and it is possible that direct exposure of the banking system to Dubai World is limited.

However, there is a larger problem of stability and future of Gulf economies that India must think about. The growth engines of the region have fuelled the Indian economy for more than two decades now.

The slow pace of urban modernisation in India, especially in a city like Mumbai , has made city states like Dubai and Singapore attractive havens for an increasingly wealthy and globalised elite.

States like Kerala have become far too dependent on financial inflows from the Gulf. All those with this kind of exposure to the region must hedge their bets.

While it is true that the global financial crisis and the slowdown did not result in a decline in inward remittances from Indians abroad, it is possible that the so-called "flight to safety" factor may have been partly responsible for this.

Even now, Indians in the Gulf may step up homeward remittances as an escape to safety. In the medium- to long-term, however, India must find newer sources of foreign exchange inflow and not remain too dependent on workers' remittances.

Dubai property recovery under threat

The fear of government-owned Dubai World reneging on its commitments to global lenders is expected to find an echo in a reversal of a recent tentative recovery in Dubai's real estate values unless the emirate manages to strike some sort of deal with creditors and / or somehow raises the cash to meet its obligations, analysts and industry professionals said on Sunday.

The ports, property and hospitality conglomerate last Wednesday asked its creditors for a six-month standstill period while it restructures its debt obligations. Dubai World has borrowed $59 billion to finance its expansion, including the acquisition of port, retail and leisure assets and the setting up real estate ventures globally.

"Unless there is some agreement with creditors on the $10 billion or so that is due in the next two months, I see an indirect perceptional impact on property values in Dubai, maybe even sending them spiralling downward again," said Ashutosh Maitra, one of the partners at a Dubai-based property marketing firm.

This would have a direct impact on the Indian investors in the emirate's real estate sector, who constitute the largest number of property buyers followed by Britons. In real terms, however, such an impact would further push back the possibility of a profitable exit.

An economist attached to an asset management firm at the Dubai International Financial Centre, or DIFC, added: "Such an impact is only likely if there is no quick resolution to the Dubai World crisis. And frankly, this seems to be a storm in a teacup. Dubai World is not seeking to renege on obligations, it is simply asking for some time out from paying off the interest while it restructures its commitments."

By the middle of this year, property values had fallen by about 65 per cent in peak advertised prices since September 2008, when a delayed reaction to the global credit crunch hit the market. According to HSBC data, May 2009 saw a slight uptick in agreed prices month on month, indicating signs of recovery. The lender said distressed stock was gradually clearing due to renewed interest as well as some repricing by sellers. "Anecdotal evidence also suggests that foreign investors seem to be back in the market and there are bulk buyers of property for investment purposes," HSBC said.

The research arm of HC Securities said the main catalyst of an uptick is credit returning to the market as mortgage providers raised their loan-to-value ratios, relaxed credit norms and lowered rates in line with a downward trend in the Emirates Inter-Bank Offer Rate, or Eibor, which fell from 3.87 per cent in January to 1.95 per cent in October.

After dropping to a two-year low of seven per cent and six per cent, mortgage values and volumes as a percentage of total transactions have since steadily recovered to pre-crisis levels, reaching 24 per cent and 14 per cent, respectively, in October. Mortgage volumes have also recorded a strong growth, reaching a two-year high of 374 units in August, as prices drop to attractive levels, only to back-pedal to 191 units in October.

However, a number of factors are likely to keep the recovery fragile. According to HC Securities' own research, 60,000 residential units are likely to hit the market between 2009 and 2011, putting further pressure on prices.

At the same time, rental returns will continue to stagnate or fall marginally as uncertainty over the business environment keeps the expatriate population lower than in recent years. Several rounds of lay-offs by large and small corporations have resulted in rents in most parts of Dubai coming under intense pressure in the past 18 months, making property investments less attractive than they used to be in the glory days of 2002 to 2007, when so-called "flippers" -- investors who bought property with a 10 per cent down payment, only to sell it one or two months later for a 100 per cent return on investment -- made massive amounts of cash.

Asking rentals in Dubai have retreated for 10 months in succession since the start of the year, dropping more than 40 per cent year to date. Occupancy levels have been driven down by expatriates leaving and new stock coming into the market. The pace of the decline, however, seems to be slowing, according to HC Securities, with rent values declining only two per cent month-on-month in September and October.

Advertised rentals on agreed sale prices resulted in yields that are higher, upwards of 10 per cent in October. Considering there is a large bid/ask spread on prices, HC Securities believes rentals are no different and estimates that agreed rental yields have compressed from a high of 8.6 per cent in November 2008 to around 5.7 per cent in October 2009.

On the other hand, this is making life easier for tenants, who now have the upper hand in negotiating down their monthly rents. Over the past four months, there has been a large population shift from the traditionally low-rent areas of Dubai into the relatively upper-crust areas where rents have suddenly become more affordable.

Any quick recovery in realty values driven by massive foreign capital, as witnessed in the boom years, will be predicated on global fund managers allocating larger amounts to the Dubai and UAE markets. "I don't see that happening very quickly," said the DIFC-based economist, who refused to be named. "Primary fund flows will be allocated to more developed markets like New York and London -- where there is an established secondary market that facilitates an exit, and where transparent data shows a clear bottoming out. I believe only the high-risk hot money like hedge funds will be allocated to emerging markets."

Also, other real estate opportunities in the Arabian Gulf itself are looking more attractive, according to several property consultancies such as Jones Lang Lasalle and Colliers. One of them is Dubai's own neighbour, the oil-rich UAE capital city of Abu Dhabi, where severe residential and commercial property shortages are keeping prices and rental yields high.

"If the Dubai World debt imbroglio results in pushing property prices down again, it will be seen as the start of the double-dip in that sector. Since perception is everything these days, the worry is the double-dip will result in a W-shaped overall economic recovery for the emirate," said the DIFC-based economist. This would be bad news for real estate buyers in Dubai, who will witness their investments eroding even more before recovering.

"These worries would prove unfounded, however, if the Abu Dhabi Government or the Federal Government takes a hand in helping out the Dubai Government, as they have done on two occasions in the past," he said.

Action on illegal PG properties Chandigarh.

CHANDIGARH: After conducting a detailed survey of unauthorized and illegally paying guest (PG) accommodations in the area, cops at the Sector-19 police station are ready to book and arrest owners of properties who are still not adhering to set norms.

SHO Ram Gopal said the operation would be launched within a day or two in sectors 18, 19, 20 and in Sector 21. He said raids and special checking would also be conducted in the early hours of scheduled days.

Notably, as many as 144 illegal and unauthorized PG accommodations were found during an earlier survey carried out by the Sector-19 police personnel along with members of resident welfare associations.

A senior police official said detailed report of unauthorized PGs was sent to the estate office for further action but nothing was done. Sources said fresh raids would be conducted by four different teams and this time criminal cases would be registered against owners. Action would be taken under Section 188 (disobedience of order promulgated by public servant) of the IPC.

Notably, UT administration has made several guidelines for PG accommodation owners and it is mandatory for property owners to follow these.

According to sources, around 300 PG properties are being run under the jurisdiction of Sector-19 police station comprising sectors 19, 18, 20 and Sector 21.

Majority of these paying guests are college/university students. Inspector Ram Gopal said the earlier survey was a warning to these owners but apparently some of them have not yet started following the norms.

IT majors worried about cascading effect of Dubai crisis

MUMBAI/BANGALORE: As World, the emirate’s investment firm seeks more time to repay almost $60-billion debt, India’s top tech firms fear that the once lucrative West Asia market for outsourcing can enter a prolonged recession and customers in other top export markets of the US and Europe may exercise more caution while making outsourcing decisions.

Tata Consultancy Services (TCS), Infosys Technologies, Wipro, HCL and Patni Computer Systems are among Indian tech firms serving telecom, banking and other customers in the West Asia region. Dubai, the biggest commercial hub in the region saw home prices plunge by nearly half from 2008 levels, reflecting the worst real estate slump during the global recession, according to Deutsche AG.

“Global confidence is coming back. We were hoping for more spends. But now the confidence of our customers is shaking. I expect they are going to be a bit more cautious about spends and will not open up so much. Budgets were getting firmed up in December—clients will now relook at the whole thing,” said a senior software executive with one of the firms that was looking at the West Asia and Africa as a growth markets. Publicly, though, few firms are willing to admit to these worries.

While Wipro counts Qatar Petroleum and Road and Transport Authority of Dubai among its top customers, TCS serves Saudi Telecom. Domestic rivals Mahindra Satyam also counts Dubai Municipality and National Bank of Dubai among its key customers in the region.

Dubai debt crisis will have limited impact

Dubai's debt crisis has rattled markets across the world as the problem revived worries about the health of the global financial system. Although the exposure of Indian companies and banks to the Emirate is negligible, concerns linger about the fallout on the broader economy.

Dubai World, the investment conglomerate of the sheikhdom at the centre of the crisis, has a debt of $59 billion — a major component of Dubai's total debt of $80 billion.

Authorities from Dubai to New Delhi have tried to play down concerns, but there is fear a sovereign debt default - should it happen – could have a cascading effect on the global financial markets.

Broking firm Geojit BNP Paribas has a large presence in the United Arab Emirates. Its West Asian joint venture Barjeel Geojit Securities LLC is headquartered in Dubai. Mr C.J. George, CEO of the firm, spoke to Business Line on the likely impact of Dubai World's current debt trouble on Indian markets, NRI inflows and on his own business in the Emirates. Excerpts:

Dubai World's debt crisis impacted the Indian markets on Friday. Will it continue to haunt the Indian markets?

The panic reaction we saw during the opening of the market on Friday was on account of the absence of any firm indication from Gulf markets due to Eid holidays. International investors do not perhaps worry too much about the impact on Indian markets. India has never been bracketed with GCC countries in the past and, hence, there will be more mature reaction in equity markets in the days to come.

Do you expect major selling by FIIs in the Indian market?

One of the most significant outcomes of crisis-ridden global financial markets during the last two years has been a growing recognition of India's uniqueness. FIIs have a more balanced and knowledgeable view of India today than in 2008. Hence, there is unlikely to be major FII selling. If that happens, there are others waiting to buy.

Will the crisis impact the NRI inflows?

There will be increase in inflows in the short-term since NRIs may consider India as a safe haven than domestic bank deposits in UAE and perhaps GCC. However, any protracted crisis can lead to job losses and business closures with impact in the medium term. In the long term, Dubai will continue to attract talent from India apart from unskilled workers, as the city will continue to be the centre of a booming GCC as long as oil is a precious commodity and Dubai is a tax haven with modern infrastructure.

What will be the impact on Kerala given the number of people from the State employed in Dubai and other Gulf countries?

During the last one year we have seen some amount of job losses leading to the return of many NRIs from Kerala. However, as Abu Dhabi started massive construction projects, a large number of them have shifted base from Dubai to Abu Dhabi. Today construction workers are shifting to Saudi Arabia as well where there is a real estate boom driven by real residential demand.

I am of the view that the worst is over for Kerala, as the current crisis is likely to be managed between Dubai and the federal government. The UAE and GCC cannot afford to leave this debt restructuring unsuccessful particularly with ample resources in federal hands.

Is Dubai World's trouble just a trigger? Do you think it could lead to a major crisis? Will it escalate to other Emirates?

Fortunately, the real estate bubble was limited to the Emirate of Dubai only and, hence, I am of the view that this will be the end of crisis for Dubai. The other Emirates are relatively stronger in terms of debt obligations. GCC countries are in better shape today after the recovery in oil prices and, hence, Dubai will continue to retain the position as a global centre in the region leveraging the proximity of Indian sub- continent.

India will be to Dubai what China is to Singapore, unless “one day” Mumbai claims that position. In short, this debt crisis will have only sentimental impact on other GCC countries and limited impact on other Emirates. This observation is on the strong circumstantial evidence that the federal government of UAE will have to support Dubai as the domestic banks have a state guarantee.

How do you see it impacting your business in West Asia?

Barjeel Geojit has been operating in the UAE for the last eight years and the customer segment is predominantly Indian expatriates. We see Abu Dhabi booming, while Dubai slowing down with a neutralising effect. After the global financial crisis we are seeing more Indian investors putting money in Indian assets than before. Hence, if there is any panic there will only be improvement in our business in the short-term. However, in the unlikely event of this development leading to a protracted crisis and job losses at higher levels there will be an impact on our business too.

Will it lead to a liquidity crunch in the global economy, given the fact many central banks are planning to exit from accommodative monetary policy?

If this had happened a year ago it would have been perhaps disastrous than today as the amount involved can now be managed within GCC itself with the bounceback of oil. Moreover, the real estate bubble in Dubai was recognised by global financiers sufficiently long ago when the global real estate market started to crack. There is unlikely to be a second leg of liquidity crunch emanating from this event.

What do you make out of Dubai World's move?

Dubai World's move to restructure the debt should be seen as a genuine effort to restructure both debt and business since the announcement talked about just six month's “standstill” whereas the $60 billion consists of different maturities up to even 2014.

Currently, while the media around the world and international investors are showing panic there is relative calm and confidence internally, perhaps originating from the trust that finally it is a problem of the whole country and not of Dubai alone. Dubai has been growing on the strength of its capability to attract capital and talent globally and they know for sure that Dubai has to continue attracting these scarce resources to remain a vibrant non-oil economy surrounded by oil-rich countries.

Nevertheless, when the stock exchanges open for trading on Monday in Dubai, there will be selling pressure from global investors.

What in your view led to the current crisis?

On the strength of the oil boom in the region, Dubai one among seven emirates of UAE, has been positioning itself as a global centre for finance, trade and tourism due to negligible oil resources at home. During the early years of the current decade seeing growing demand for real estate, the Government started marketing housing projects offering 99 years of residence permit. Such a residence offer for investors in housing projects was neither denied by the Government nor approved. This led to an unprecedented boom in real estate, attracting rich investors from India, Russia, Europe and other places.

Both accounted and unaccounted global money started chasing real estate leading to even “day trading” in real estate.

There were even cases of buying in the morning and selling in the evening! Finally, when the global financial system cracked, the Dubai real estate bubble also crashed. The construction-driven economy was slowing down with highly leveraged projects. Dubai World, the real estate and infrastructure arm of the ruler of Dubai, was excessively leveraged during the boom years and when the demand disappeared had to catch up with debt repayments without positive internal cash flows.

While the boom in real estate collapsed, the federal government finally came out with a clarification that the buyers of real estate can only have six months renewable VISA in place of the highly publicised perception of 99 year's VISA. This was a bolt from the blue which was the last nail.

However, while Dubai was declining, Abu Dhabi, the cash-rich Capital city Emirate started booming on investment-driven by own capital. Abu Dhabi has been a lender of last resort for Dubai with vast oil resources and global financial investments of more than a trillion dollars. Abu Dhabi came out with a landmark announcement a year ago by declaring State guarantee on all bank deposits which led to calm in banking sector.

If Dubai announces any investor-friendly revision of VISA period, it can dramatically change the fortunes of domestic real estate market.

Buying real estate? Read this first!

Traditionally real estate in the form of the house that we live in has been the single largest investment for most of us. This is seen not only in India but across the world. Let us now apply the metrics that we attribute to investments in general to real estate and see the answers that come up.

Current income

If the investment is on the house that we live in ourselves, there is no current income. This is one of the main negatives about the house that we live in. In a financial cash flow perspective given by Robert Kiyosaki, it is not an asset. Because the house is cash flow negative owing to the maintenance activities and tax that we have to pay for it.

Rent from a house or commercial property is a good source of current income. Although at current bank rates the rent from a house is generally only about ½ of the loan EMI, the catching up happens only after the loan is closed. A 1000 square feet house will cost conservatively about Rs 2500/- per square feet (in B class cities like Coimbatore, Kolhapur, Guntur, etc) leading to the house value of Rs 25 lakhs. A loan for 80 per cent of the value (Rs 20lakhs) at current interest rates (9 per cent) and 15 years term will require an EMI of about Rs 20,300. The rent for the same house in the mentioned cities may not top even Rs 10,000.

If we had 5 per cent yearly increment on the rent as part of the agreement with the tenant, the rent will be equal to the EMI in the 14th year.

Another aspect of the real estate property which requires attention is that the cost of maintenance also keeps growing. For example, Akash had to spend Rs 35,000 for a sump rework in a house build by his grandfather. The original cost for the construction of the house itself was only Rs 30,000 including the compound wall, and a fountain in 1967.

So a fully paid up rental property is an asset with good current income otherwise financially it is a liability.

Capital appreciation

Real estate appreciates in capital - particularly the land. The building generally depreciates. Recently the National Housing Bank launched the Residex, an index which will track the capital appreciation of real estate house properties. The data is updated for 3 years now. Over a period of time, the index can be used as a good measure for the capital appreciation of housing properties.

A key aspect of the capital appreciation is that, it can be realised only when it is sold. And generally the house that we live in is the last of the assets that we sell. This has to be factored in before we make the house the largest investment in our lives.

The capital appreciation of the house can favorably be used in the form of a mortgage loan for business purpose or in the form of a reverse mortgage post retirement. The land that cost Akash's grandpa Rs 100/- per cent, is today worth Rs 600,000/- per cent. This is at a compounded annual growth rate of 23 per cent. Other property locations (grandsons) may or may not be so fortunate.


The risk with real estate is that it can go down sharply. The current worldwide economic turmoil is because of real estate prices dropping more than the expectation. The other risk is related to its liquidity itself.

Real estate prices in India do not have a formal/scientific basis for quoting. Brokers are the key pins holding the structure together. The same property may be quoted at different prices by the same broker for selling and for buying. The difference in amount goes to the broker – this, apart from their consulting fees. The pity is that often the difference is more than the profit for the owner of the property itself.

The other risk is that only a portion of the sale price may be registered, the rest is paid as 'grey or black money'. Accepting such deals are counter-productive when we go for the selling as we have to bear the brunt of extraordinary capital gains.

The situation is changing but very slowly for comfort.


Real estate is probably the most illiquid of all common investment avenues. If there is an urgency to sell a property the value could drop drastically. Selling at 'market price' is counted in number of months not days.

Tax treatment

Real estate attracts capital gains tax. The advantage is that we can use indexation benefits to our advantage. The indexation index is announced every year by the Income tax department. This is a number which links the inflation to property values. By using indexation, we can estimate the true appreciation of the real estate after adjusting for inflation.

The tax on the sale of the only house or agricultural property can be brought down to zero by reinvesting the sale proceeds in a new house or agricultural property. The capital gains can also be invested in low interest yielding capital gains bonds.


Real estate has a low level of convenience. It requires a large corpus for investment leading most of us to take up loans. Here are a few smart marketing companies that sell land in installments. However the overall cost for such deals is very high compared to one time payments.

The decision after buying a property cannot be reversed quickly or economically. The cost for registration, brokerage charges and taxes prevent us from getting rid of a wrong purchase quickly.


Traditionally, real estate has been the major investment avenue across the world. The trend is not due for a change as the capital appreciation is good. However the points to be thought about are that:

Capital appreciation can be enjoyed only when the property is sold or when the value is unlocked through a mortgage loan or reverse mortgage.

The house that we live in is not a financial asset as it has negative cash flow.

Rent proves to be a stable and reliable source of income. This however is only applicable to properties that are free from loans.

Overall convenience is low for real estates.