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Bubble Bursting - Use it to Your Advantage

Discussion in 'Dubai property' started by Design Architect, Jun 28, 2008.

  1. Design Architect

    Design Architect New Member

    Dear All,

    I can't help you with my comments on what to do, but I'm thinking that people smarter than me would fill this post.

    Let's be smart - and take advantage of all situations that's going to happen
    Bursting or no bursting...

  2. Investoman_uae

    Investoman_uae New Member

    How can you take advantage of a Bubble Burst? :D It bursts dude. . .all air is gone. .. cant do anything but say "oh s***"

    But lets not be too negative. This country's economy is goin well, its oil backed... also alot of investors who are much bigger than me and you have invested in this market... so everythin will be done to maintain this Dubai Success.

    Maybe the reward will not be as big as it used to be and this is whats called a correction, but a total burst? i dont think so. Prices will need to be corrected because they are goin up toooo quickly.

  3. Design Architect

    Design Architect New Member

    About Right

    Yes, you're about right.

    Maybe the name of the topic is a bit too much.
    Ok - so what would be best move to do when prices start to go down. Probably it will cause some panic - so that panic can be used to someone’s advantage...right? Just thinking of all possibilities.
  4. wesrae

    wesrae New Member

    Are you sure!

    Do you live in Dubai? Do you know the market?

    As far as I can see prices are increasing weekly, showing no sign of a correction or "bubble burst." I'm not saying that it won't happen, but you are talking as though it is happening now!

    If you know something we don't then please divulge?
  5. Design Architect

    Design Architect New Member

    Not now

    If you look at what I wrote - I didn't said that it's happening now. If it was happening now - it would br too late to do anything!

    I'm hipoteticaly talking about time 2-3 years from now...or 1-2 years from now...who knows
    And yes, I live in Dubai and look to buy property.
    Last edited: Jun 29, 2008
  6. New_Investor

    New_Investor Banned

    mainly the wise man will buy when prices are low and resell when it goes up again, but currently i don't see a bubble happening now due to the following

    1. Demand still more than supply due to delay in handover and completion
    2. Demand for rental is increasing as emirates receive 600 new residents daily as i red in Arabian
    3. Inflation keeps on fueling price increase
    4. low interest rates in Dubai keep fueling the demand for buying properties in the marker by end user as mortgage cost will be low.
    5. increasing rent will shift tenants to buy properties which will lead to increase demand, hence higher prices
  7. really_true

    really_true New Member

    One i Dont see prices going down becoz of the following
    1) costs are increasing day by day
    2) increasing demand

    on the flip side actual end user demand is around <20% (arabian business survey) 80% of the people are investors who are hiking prices most of them will turn to being people who hold prices so will the prices actually go bust ...MAY be YES may be NO

    It all depends on other factors where the investments would give better returns -- if other avenues of investments then would give better returns than real esate then the prices would fall to the extent of costs being the limiting factor .

    All the best to the people who invest --
    All the best to the people who look at the people who invest and think they are the smart ones sitting in the side lines .
  8. propertyfinancer

    propertyfinancer New Member

    Bubble Burst!!

    Well they say what goes up comes down!! there will be a burst but not in the next 7 years which is confirmed unless U.S. gets really upset at U.A.E or any of its neighbour

    But dubai and abu dhabi prices will increase due to high input of money in these cities and no control on inflation, so by the time they crack or control this inflation it will take seven years, if i got the maths right from meryl lynch.

    There will be enormous increase in Abu Dhabi as they have tremendously slowed down giving approval to developers so the demand will henceforth increase drastically.

    Ajman will see a lot of end users and it is predicted that 30% of U.A.E population present right now will live in ajman by year 2015

    Dubai will be an exclusive hub to HNI, and prices will stabilise by 2015 and it is also predicted Marina prices will collapse due to weak infrastructure of raods and transport.

    I have got the whole report as stated by different companies. Lets make it easy to understand for a common man, E.g: IF A FORTUNE 500 COMPANY FIRM RIGHT NOW DECIDES TO PURCHASE AN OFFICE IN DUBAI THEN PRICES WILL STABILISE 2015 COZ THE COMPANY BELIEVES IT IS SAFE BET TO BE HERE.
  9. Stephendxb

    Stephendxb New Member

    Dear Design Architect,

    Some interesting comments posted and from what I gather it would appear you are on the sidelines wondering if you should buy or not...correct? Your concern is
    that perhaps in a couple of years (more or less) the property bubble will burst.

    First let me say it is not people "smarter" that can answer the question, but it is perhaps ones that are better informed.
    To understand a property market you need know the fundamental elements that fuel it. Lets look at the recent past first...
    The Middle-East, Dubai included has benefited from record oil prices fueling (pardon the pun ) the economy.
    Statistics from the Colliers report indicating a 78% in the year to the first quarter 2008.
    The demand for properties is higher than supply which means completed properties can command a premium. This also fuels the secondary market.
    Dubai has established itself as a financial hub and global city, this in itself attracts further investment.
    The Dirham is still linked to the dollar.
    Prices compared to the global market are still low.

    So yes, eventually there will be a "correction" as all property markets go through a cycle. The question is when? money would be on a few years down the road, but even this should not be cause for alarm.

    If you are planning on staying in Dubai for a few more years...then buy. Remember it is the price you buy for and then ultimately what you sell for that will determine if your investment was a good one. The buying price is a key factor.
    Take a simple example.

    You rent at Dhs 100,00 per annum ( fixed for 5 years )

    Thats 500,000 you have LOST. ( Yes its that simple )

    Instead you decide to buy. ( You have a 100,000 saved ) or less, as a deposit
    You find a property for 1,000,000 ( lucky you )
    You have arranged a mortgage for 25 years ( Your monthly repayments would be around 6,400 for principle and profit for the remaing 900,000. So if your company is paying the rent they are effectively buying your home for you, even better.
    Assuming a very modest 10% increase over five years then the same property would be worth Dhs1,610,000. However at current rates you will achieve this a under two years.
    If five years you decide to sell and leave Dubai. You sell for Dhs 1,600,000 you deduct the balance of your mortgage Dhs 500,000 leaving you Dhs 1,100,000.

    The above is only rounded off and does not consider inflationary costs.

    but the point is renting is money down the drain....unless you are the landlord.


  10. Design Architect

    Design Architect New Member


    You are exactly right. I'm asking such questions and posting such topics in order to get responses and information. Post is deliberately named like that - to provoke people, and to get theirs best and worst reactions...

    At the end - I didn't told you anything, and yet you know a lot about me. That's experience. And thinking...

    I will invest - I'm just gathering as much as I can :)
  11. Investoman_uae

    Investoman_uae New Member

    What if property prices are going up faster than you can gather? Now this will tell you when you should invest. :D

  12. Design Architect

    Design Architect New Member

    Good's already like that!
  13. Stephendxb

    Stephendxb New Member

    what would you do??

    So what would you do?

    I received an email from a friend with the follow question.

    I want to invest and have a couple of options…

    1. Invest in off plan property called XXXX. I would take financing from the bank, buying at low 1000dhs/sqft. Keep it for 6 months to year (maybe longer if the appreciation is good) and then sell it for capital gain

    2. 2. Invest in already finished property - finance it and rent it. Based on that I would then use that property, for getting bigger loans easier (use property as guarantee, and then do the step No.1)

    Before I answer the question, ask yourself what you would do? And just as important why?

    So what is the answer to the question? Well I am sorry to report that there is no correct answer. That is to say what might suit one person might not suit another. As I have said in the past, many factors come into play and these need to be considered. But let’s have a look how the figures stack up.

    Off plan.
    “Flipping property has undeniably given huge returns for those investors who got in early. The question is will it now? The underlying factor is supply and demand. Diminish the demand and prices will fall, that is not yet the case here, but in the future it will be, so buying off plan is no longer a question of taking the first thing that comes along and then selling it again several months down the road for a handsome profit, it can still be done but those days are numbered.

    The Scenario,

    Picture this scenario. A developer launches a new project. This development has 5 buildings (A,B,C,D and E) of G+10. Each floor has 6 apartments, three facing south and three facing north. (A total of 60 apartments per building) Building A has a lake view in front, building B and C have a G+5 in front of them and buildings D and E have a full building in front of them. A G+10 is also at the back of each building.

    You decide to buy one of the apartments off plan (For arguments sake the prices are the same, only building A is 5% higher because of the view) As building A was more expensive you decide to buy in building D.

    Several months later you want to sell, as I said in the past it probably wouldn’t have been a problem, but now the market has mushroomed further with the launch of many more developments. This is the moment when those speculating will start to feel the pinch. Of the 300 apartments (D and E) have no view, that’s 120 apartments. In B and C only apartments from floor 6 to 10 in the front have a view (30 total), meaning 90 again have no view. In build A those on the front have a view (30) whilst those at the rear have no view, again 30. So in total only 60 apartments have a view of which 30 have the lake view. Which means only 10% have the lake view. In a secondary market that becomes more competitive and buyers more discerning, it is vital to have the edge when it comes to selling.

    Back to the numbers.

    Question 1.
    Invest in off plan property called XXXX. I would take financing from the bank, buying at low 1000dhs/sqft. Keep it for 6 months to year (maybe longer if the appreciation is good) and then sell it for capital gain

    Again for arguments sake let’s use the following:

    You have Dhs 300,000 to invest and the apartment cost 850,000. The property is off plan and the payment terms are 15% down (127,500) and then 10% every 3 months 5 payments and the balance of 35% on completion.
    So you make the second and third payments of Dhs 85,000 each. You have paid a total of 297,500 not including any administrative costs. (Doesn’t leave you much in the bank either) You have now owned the property for 6 months. During the year prices have risen 40% meaning you property is now worth Dhs1,020,000.(20% for the six months) If you sell before the next payment you would have made Dhs 170,000 profit (or 20%) Not bad. That’s if the market is showing growth and assuming you can sell, refer to the scenario above.
    However if you are taking finance from the bank then you must factor in the interest payments and this will considerably diminish any returns, that’s assuming you can get the loan in the first place..

    Question 2.
    Invest in already finished property - finance it and rent it. Based on that I would then use that property, for getting bigger loans easier (use property as guarantee, and then do the step No.1)
    You have Dhs 300,000 to invest and the apartment cost 1,200,000. This time the property is completed. That’s why the purchase price is higher, all a question of supply and demand remember.
    You take the mortgage of 900,000 for 25 years at a rate of 7.5% then the repayments would be approximately Dhs 80,000 per year. In five years you would have repaid about Dhs 72,925 from the principle of your mortgage. With the rising costs of inflation it is good to hold the asset as it will also appreciate, holding money in the bank could result in the opposite. If bank rates are 5% and interest is rising 12% then you are effectively losing 7% per annum.
    If the property appreciates at only 12% per annum compounded, then the property would be worth in the region of 1,630,000 in five years.
    Renting the property at current market rates would generate in the region of Dhs 100,000 per annum. This would at least cover the mortgage payments with current market conditions. However it is widely expected that interest rates will drop further, this will result in lower repayments. A 1% drop for example will mean repayments reduced from Dhs 80,000 to Dhs 73,000 per annum.. This will help should the rental rates begin to decline (expected from 2010 in my opinion)

    This is the longer term and more passive approach to property investment. What may suit one individual may not suit another so it’s all about calculated risk…but I hope this helps. :)

  14. DAYFox

    DAYFox New Member

    Good analysis!!!
  15. benho

    benho New Member

    Another factor of buying off plan properties is the "Completion time"!. The longer the dealy, the more that you lose money in real terms, and all the other opportunities costs.

    With the raising costs of construction, e.g. Structural Steel raise 80% from last year, and cement raise by 40%. The cost of the building is going up in Dubai, and the developer will lower the qualities of the finishes to maintain their profit margin.
  16. really_true

    really_true New Member

    The more complex u make it it will be harder than rocket science
    My simple formula for success
    buy low cost - buy good stuff and sell ASAP LIMIT YOUR GREED I iwould say and see how u make money .
  17. Stephendxb

    Stephendxb New Member

    The formula is good...and yes simple. So why can't everyone make it work?. Probably the greed, but understanding the basics certainly helps.

    A good formula for the modified internal rate of return would be
    V = -R (1+i) ^n - [R (1+i) {(1+i) ^n - 1}/ i]
    Where "V" stands for expected future value of the investment, "R" stands for present value of the investment, "n" stands for the time period the investment is to be made, and "i" stands for rate of interest for the designated period "n", "^" denotes exponential figure.

    But knowing that Cash In - Cash out would probably do aslo :)

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