GalaTime

The latest on Dubai’s residential property market - Colliers International  House Price Index, Q1 2009

… for the first time since the inception of the HPI, it shows a reduction in the year-on-year statistics, with a decline of 34% in house prices overall since Q1 2008 – prices are currently at approximately Q2 2007 levels. Villa & townhouse prices decreased by 40%+.

The withdrawal from the market by two of Dubai’s largest mortgage providers, combined with introduction by the remaining fnance providers of stricter lending criteria, naturally produced a fall in the number of transactions as it became more diffcult to enter the market.

Biggest boondoggle by far - bubble bound to burst.

• Mint: World steel demand to fall most since World War-II

World Steel Association (Worldsteel), whose members produce around 85% of the world’s steel, expects the apparent steel demand to fall by 14.9% to 1,019 million tonnes (mt) this year, compared with 1,197mt last year.

India is one of the few countries that the association projected to buck the trend, predicting 2 percent growth in steel demand for the Asian nation this year. Figures confirmed Christmas’s view of the picture worsening in developed nations. Demand for the metal, used in construction and automotive industries, is seen down 36.6% in the US and 28.8% in the European Union.

• Bullion Vault: China & the Fed: Blowing Bubbles

• Bloomberg: Simon Tried to Buy General Growth Malls

Simon Property Group Inc., the largest U.S. shopping-mall owner by stock-market value, tried to buy real estate from rival General Growth Properties Inc. before it filed for bankruptcy, Chief Executive David E. Simon said. “They didn’t realize they were a distressed seller,” Simon said in a panel discussion at the Milken Institute Global Conference today in Beverly Hills, California.

“You have a scenario today where you have very few ‘03 to ‘07 financings that are above water,” he said. “You have more debt than you have value.” Such owners have no incentive to sell as long as they owe more than their properties are worth, Zell said. Investors will buy distressed debt for “the next two to three years” as those properties go into foreclosure, he said.

• Zero Hedge: The One Trillion Commercial Real Estate Time Bomb

I focus on some additional facts about why the unprecedented economic deterioration and the resulting epic drop in commercial real estate values could result in over $1 trillion in upcoming headaches for financial institutions, investors and the administration.

Combining all sources of CRE asset holdings demonstrates the true magnitude of this problem. The period of 2010-2013 will be one of unprecedented stress in the CRE market, and a time in which banks will continue taking massive losses not only on residential mortgage portfolios but also on construction loan portfolios, the last one being a possible powder keg: Foresight Analytics estimates C&L loan losses at a staggering 11.4% in Q4 2008.

… nearly 68% of loans in the next 4 years will not qualify for a refinancing at maturity putting the whole plan to merely delay the day of reckoning indefinitely at risk of massive failure.

• China Financial Markets: The death of the Asian development model

… if the explosion in new lending (loans are up 15% in the first quarter of this year) leads, as it almost certainly will, to a subsequent explosion in non-performing loans, in the next few years just as China is expanding its production and struggling with US reluctance to absorb its rising excess capacity, the resolution of the NPLs will itself constrain Chinese consumption.

If the Asian development model is dead, China will need domestic consumption growth more than ever, and this is cannot be the best time for China to try to revive the production-enhancing model in a way that may limit future domestic consumption growth. 

• NY Times: Recession, Far From Over, Already Setting Records

• Calculated Risk: IMF: Global Synchronized Cliff Diving
  

• Reuters: An emerging opportunity in U.S. housing
  

… historically cheap long-term fixed-rate financing (less than 5 percent on a 30-year mortgage) and the prospect of some nasty inflation a year or two out, both courtesy of current Federal Reserve and government policies, make owning a real asset that is debt financed a lot more attractive than would have been the case just three or six months ago.

… while housing won’t exactly thrive in a period of high inflation and low growth, it may perform reasonably well compared to the alternatives. Government bonds will get whacked by inflation and stocks may do a bit better than bonds over the medium term though they will suffer as the quality of earnings declines.

Rise in mortgage rates to offset further price declines? Maybe 6 months too early.

• Independent: The dark side of Dubai

“The thing you have to understand about Dubai is – nothing is what it seems,” Karen says at last. “Nothing. This isn’t a city, it’s a con-job. They lure you in telling you it’s one thing – a modern kind of place – but beneath the surface it’s a medieval dictatorship.”

There are three different Dubais, all swirling around each other. There are the expats, like Karen; there are the Emiratis, headed by Sheikh Mohammed; and then there is the foreign underclass who built the city, and are trapped here. They are hidden in plain view.

“Here, nobody shows their anger. You can’t. You get put in jail for a long time, then deported.”"Most companies are owned by the government, so they oppose human rights laws because it will reduce their profit margins. It’s in their interests that the workers are slaves.”

The new Tiger Woods Gold Course needs four million gallons of water to be pumped on to its grounds every day, or it would simply shrivel and disappear on the winds. The Emirates’ water is stripped of salt in vast desalination plants around the Gulf – making it the most expensive water on earth. It costs more than petrol to produce, and belches vast amounts of carbon dioxide into the atmosphere as it goes. It’s the main reason why a resident of Dubai has the biggest average carbon footprint of any human being – more than double that of an American.

“everything in Dubai is fake. Everything you see. The trees are fake, the workers’ contracts are fake, the islands are fake, the smiles are fake – even the water is fake!”

Strong words.

• Economist: Japan - The incredible shrinking economy

• WSJ: Clean-Energy Industry in the Doldrums

Sorry about all the doom & gloom links; just balance it against the euphoria in Indian markets.

• TheStar: Dubai: How not to build a city

… in Dubai, the visitor realizes in nanoseconds that this is a city dedicated, enthusiastically, if not slavishly, to the car, the bigger the better. People just aren’t meant to be pedestrians here, but drivers.

As for those skyscrapers that crowd Sheikh Zayed Rd., each more outrageous than the next, they have the strange effect of cancelling each other out. Each becomes unexpectedly meaningless, rendering any discussion of architecture irrelevant.

As a result of this frantic race to outdo the guy next door, architecture has been turned into a sideshow attraction. Starchitecture is the least of this city’s problems. Dubai resembles nothing so much as a cross between Mississauga and Las Vegas, but on a massive scale.

• Business Standard: New partnership law in place, but legal and tax hurdles remain

The Ministry of Corporate Affairs (MCA) has started registering firms under the newly-enacted Limited Liability Partnership (LLP) Act. However, a flow of applications is unlikely till tax laws are changed, say experts. At present, the Income Tax Act does not recognise LLP firms.

Under the LLP structure, the liability of a partner is limited to his stake and no partner is liable on account of independent or unauthorised acts of other partners. Individual partners are shielded from the joint liability created by another partner’s wrongful acts or misconduct.

A New Delhi-based legal consulting firm, Handoo and Handoo, is the first firm to register under the new Act.

• Mint: The cost of capital of private equity is very high

I think a lot of private equity firms who should not have existed in the first place will not exist. May be it’s five times too large and this means that 70-80% of the funds that exist today will not exist five years from now.

If you look at the cycle around 2001-02 (bottom of the cycle) profits after tax as a percentage of revenue of the Indian corporate sector was around 1.7%. Last year (at the peak of the cycle) it was 6.7%. So if you assume that the cyclicity will get repeated, you would assume that the profitability of the private sector can get hammered.

The growth (of GDP) used to be 9-9.5% in real terms,15-16% in nominal terms, 22% in currency appreciated terms (the currency was also appreciating in 2007) and, if you picked the sectors right, you could get 5-10%. Finally, if you picked the companies right, you could get another 5-10% on that, which theoretically brought you to almost 40% returns. Assuming that we made some mistakes, still it was possible to get 30% return.

• FT: We modernised ourselves into this ice age

Thus, one of the major causes of the financial crisis was not how lax our regulation, or how hard we enforced, but what we chose not to regulate.

Indeed, what we decided was old fashioned and in need of modernisation was, in fact, an effective check on an activity that for 100 years had been illegal, for good reason. As a result, we modernised ourselves into this ice age.

… if you offer a guarantee – no matter whether you call it a banking deposit, an insurance policy, or a bet – regulation should ensure you have the capital to deliver. If you offer investments, be transparent, but buyer beware.

• NY Mag: My Manhattan Project

I never would have thought, in my most extreme paranoid fantasies, that my software, and the others like it, would have enabled Wall Street to decimate the investments of everyone in my family. Not even the most jaded observer saw that coming. I can’t deny that it allowed a privileged few to exploit the unsuspecting many. But catastrophe, depression, busted banks, forced auctions of entire tracts of houses? The fact that my software, over which I would labor for a decade, facilitated these events is numbing. Is capitalism inherently corrupt? I don’t think the free flow of goods in and of itself is the culprit. No, it’s the complexity masked by thousands of unseen whirring widgets that beguiles people into a sense of power, a feeling of dominion over the future.

• MISH: California Association of Realtors (CAR) March 2009 Analysis

70% down from the peak!