Friday, March 7, 2008

The Unforeseen Hazards of Construction and Real Estate in Dubai

I have seen quite a few advertisements (including one flashing billboard) to buy real estate in Dubai during my stay in Moscow. Part of this I'm sure is just going farther afield efforts to prop up the real estate sales, but the fantastic promises made by advertisers here bring to mind some of the issues that are involved. I am also in the early stages of shopping for a new residence myself, which probably accounts for why these issues seem so fascinating and hazardous.

The first real issue for foreigners such as myself is the type of land. I am only interested in freehold, which means property which I can purchase and own, as opposed to leasehold, which is property that I own, but on land which I am only leasing from the government. This lease can be for 99 years, but it does increase restrictions on what I or any heirs can do with it. It was the introduction of widespread freehold property that really sparked the beginning of the property boom/bubble a few years back. That the offer of a residency visa (and the banking privileges that includes in the tax-free USE) with a purchased residence.

For starters, while a growing number of completed villas and apartments are available for sale throughout Dubai, many are still under construction. They tend to cost a little less than comparable ready-made residences, and there have been many cases where buyers could sell them at a great profit once they were ready, but there are also risks. I am only looking at completed housing, however, mostly because of the first two of the following concerns.

The first is the most obvious. An image which looks good in an artist's rendering may be put together with poor quality finishings, or not even look that way at all. I've seen ads showing grass and trees where there were none, and even ads which erase neighboring buildings, to give the building being sold the appearance of being in a more spacious area, or, in one case, on the waterfront where in reality and entire row of buildings stands before it (alas I misplaced the ad in question, but it was for a building in the Marina area and the ad is in the In-Flight magazine for Emirates, among other places). You buy now, and when you move in your wall could be cracked, the faucets super cheap and unattractive, the playground non-existent and the wide green lawn a small bricked over terrace. This is enough of an issue that there is an ad on the radio for one development using the promise that the completed development would match which was promised as their "hook."

New topography. One of the cooler things about construction in Dubai is the ability and willingness to change the topography to suit the building. The Palms are probably the most famous cases of this, but they are by far not the only ones. While the Marina was first being built, buildings that were on the water when first showed and sold later became a few rows away as the land was filled in. On the Jumeirah Palm apartments that had a canal view when sold now have a view of earth (a filled-in canal) which supports the elevated metro platform, and will one day be a view of the elevated metro itself. One person I know purchased their apartment across from the actual Marina because they were pretty sure that the Marina would be left alone and that his Gulf (and Palm) views would be preserved.

Financial risks. These aren't so terrible, but they exist. I do not mean that the prices of your purchase could go down; they could, and although a workers amnesty reduced the number of construction workers in Dubai, which reduced the number of construction sites that could run 24-hours cycles, or just extended-schedule cycles, which in turn slowed down how quickly they would all be on the market and increase supply, they will still be finished one day, which will increase supply, which will have an effect. The whole market could collapse entirely for that matter (I don't think it will, but it could).

The financial risk that I am talking about is the one borne when you put money down. This is of course a standard practice if you purchase an apartment or villa still under construction. I did the same when I bought an apartment in the US. The difference is that when I put my money down in the US it went to an escrow account, where neither I nor the developer could touch it. When the building was finished and we went to settlement, that money was added to the rest of my payment to pay the entire amount. In Dubai the developer gets the money immediately. They could save it, invest it conservatively, use it to fund the construction of your development or give it away for all the control you have. They tend to invest it. This became a problem a while back however, when one of Dubai's two major development firms gambled big and lost a lot a large portion of their assets on the Dubai stock market. The company could have gone under and everyone who made deposits would have been out of luck. The good part about an authoritarian government and (semi)managed economy, however, is that this was not allowed to happen; that company's leadership was ordered to save the company using their own considerable personal assets, which they did.

An ad for yet a tower in the marina area. The area looks like that, only the buildings are surrounded by many others, there is no water in the background, and the trees (clearly photoshopped in in the original photo) occupy area occupied by more buildings in real life.

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