Property bubbles, ghost banks and Dubai's luxury McMansions!

I never allow myself to forget Lord Keynes's dictum that markets can remain irrational a lot longer than you can stay solvent. This dictum holds as true for shorting a white-hot software/internet stock on Nasdaq as it does in overstaying your welcome in a parabolic property market bubble. In the 1980's, Japan experienced an epic bubble in the Nikkei Dow and Tokyo real estate and investors tripled and quadrupled their money in the 5 years before 1989. The Nikkei Dow peaked at 39000 in late 1989, a year when Japanese investors were a tidal wave on Wall Street, buying everything up from the Rockefeller Center to golf courses in Hawaii and movie studios in Hollywood. In Japan, real estate prices hit the stratosphere, with the Imperial palace complex in the heart of Tokyo valued at more than all the land in California. This was madness, even if property brokers, bankers and fund managers were programmed to assure us with a straight face that it was all part of a new paradigm in the Empire of the Rising Sun and thus all entirely rational. In my lifetime, I have learnt the hard way that every asset bubble creates its own tribes of chest beating, bubblegum financiers, brokers and speculators.

Japan's property bubble ended in tears, as they all do. The banking system was wiped out after two decades of deflation. The property market lost 80% of its 1990 peak. The poor souls who bought Japanese stocks in 1989 are still waiting to breakeven 34 years later. It is impossible to invest in global property shares without an instinctive grasp of the interest rate/credit cycle, the role of high-octane leverage and supply/demand shock metrics as varied as demographics, offshore capital flows, FX, consumer behaviour and central bank liquidity. So the meteoric growth of e-commerce was fabulous for investing in warehousing/logistics. Just Google the chart of Equinix (EQIX), the world's preeminent data center landlord and you will understand why I have gone gaga on this exponential return property REIT for the past 15 years as it correlated with the viral curves in cloud computing, smartphone usage, data storage and now AI. Yet hybrid work has been a disaster for valuations and occupancy rates in even trophy office buildings in global hubs like London, New York, Paris and Frankfurt.

In China, overbuilding and speculative excess has created ghost cities, bankrupt developers, provincial governments and a $4 trillion financial black hole that condemns the PRC to Japan's two "lost decades". Irrational exuberance can be fatal in a leveraged property markets. Dubai's property market has globalized on steroids since its birth in 2004. It experienced a parabolic 5X bubble between 2004-2008, a period when oil prices soared from $30 to $148. This was followed by an epic 60% property meltdown that even gutted mortgage finance IPOs like Amlak and Tamweel. Dozens of developers?defaulted on bank loans and skipped town, leaving half-built buildings and ruined investors. Home prices continued to fall until the epic $25 billion restructuring of Dubai World's debt to its 125 banks and hedge fund creditors. There was a dead cat bounce rally of 30% in 2013/2014 on euphoria over the Expo 2020 award. Yet Dubai home prices plunged by 50 to 60% again after the oil crash of 2014 triggered another brutal 6-year bear market.

The moral of the story is grim. UAE banks have a disproportionate exposure in loans to property developers and construction companies,?often one third of the loan book. So when property prices plunge, banks are forced into shotgun marriages, known in polite company as horizontal mergers. Dozens of banks in the Gulf have gone extinct in epic property boom and bust cycles. The ghosts of Ajman Arab Bank, Middle East Bank, Al Khaleej Commercial Bank, Dubai Bank, Union Bank of the Middle East, Federal Commercial Bank, NBS and so many others are eloquent testaments to the risk of overlending when the collateral is such high beta kryptonite. These banks were all alive in my salad days but they are now dodo-dead.

The GDP of New York city is $1.6 trillion. The GDP of Dubai is $84 billion and its population is one-fourth that of the megapolis (Big Apple/Gotham!) I once called home from my guy cave in Manhattan's boho Greenwich Village. So does it make rational sense that Dubai had more homes worth $10 million or more sold than New York City, London, or Hong Kong in 2022/2023? If it quacks like a duck and walks like a duck, is it indeed a duck, are we now in the ooh lala twilight zone of bubblenomics yet again? Why cannot I surf YouTube for ten minutes without being inundated by ads from developers offering hot off-plan deals? Why did I give a smart phone?to my associates to let them handle the hard talk sales pitches from property brokers who rig the markets so shamelessly in Downtown buildings with daisy chains of a dozen brokers getting paid to lure one poor offshore buyer to an ironic "apartment with a one sixteenth Burj/fountain view from the loo!". I was born at night - only not last night.

The spectacular rise in luxury home prices since 2021 in Dubai makes perfect economic sense to me. The emirate had a stellar track record in its response to COVID and is both the financial hub and chilax?playground for South/Central Asia, Russia, Iran and Africa's business elites. The inventories of luxury homes in enclaves like Emirates Hills, Palm Jumeirah and Jumeirah Bay were miniscule relative to the post COVID demand from digital nomads with cold hard cash to invest. I was stunned to read that 176 properties worth $10 million were sold in the first 6-months of 2023 alone. Friends in New Dubai report that their villa rental have been hiked up by 50 to 100% and suddenly every owner has a daughter or son who wants to move into a hot rental property to evade RERA's rent control.

When I used to visit Monaco, Mykonos, Marbella Puerto Banus or Palm Beach in the 1990's, I always dreamt that Dubai could one day rival these fabled enclaves of the international jet set. Yet I never thought I would see this transformation in my own lifetime, a testament to the visionary genius of HH Sheikh Mohammad.

Dubai is a major player on the luxury circuit but prices are not cheap and leveraged buyers could face distress since dollar rates are not coming down for a long time. I do not see any imminent meltdown in the luxury segments. The average price per square foot is $1900, lower than for rival cities. More than 70% of luxury sales are in cash and thus high mortgage rates have a limited impact. Property taxes in Dubai are 4% but can be as high as 15% in London. The influx of buyers is not just limited to Russians escaping the Ukraine war or Chinese fleeing from Xi's crackdown, Indians escaping tax extortion and South Africans escaping crime/rand's noosedive and surfing a tidal wave of Ooplung cash.?Dubai also attracts London hedge fund managers, crypto princelings, Israeli investors, every rich Pakistani business clan I know and bankers from Asia. Yet luxury prices have risen 70% in the past year, compared to 2% in London, 8% in New York and 10% in Paris. Is it bubblicious now? Yes. Is another?50% drawdown, as in 2009 and 2014 imminent? No. Will the offplan punters get slammed when the music stops? Yes. Are oversupply gluts?brewing in multiple areas? Yes. Bottomline, get real. Dial down risk. Risk is a four-letter word but then so is ruin.