Dubai Offers Cash For (Real Estate) Clunkers

The story of Dubai’s real estate market over the past eight years would make an exciting flip-book. A sleepy port town introduces freehold property rights for foreigners (May 2002) and- hang on to your hats- a buzzing metropolis is born. A glittery skyline comprised of office towers, hotels and cheap residential high-rises sprouts like mad for the next seven years, pushing the city’s boundaries ever-outward into the desert. Then credit crunch! Debt freeze! Awkward bailout from Abu Dhabi. Expats flee and property values are leveled, down at least 50% from their peak in 2008, maybe more.

Clearly Dubai Ruler Sheikh Mohammed bin Rashid Al Maktoum and his cabinet have some wreckage to pick through. So while government officials hold talks with creditors in London and try to stave off another strings-attached handout from Abu Dhabi, the Ruler has a new idea of how to raise cash. Let’s blow up the bubble:

Dubai government Monday introduced new laws that will allow locals to develop commercial and industrial land previously gifted to them by the sheikdom’s ruler.

The decree is designed to “revive the real estate and the commercial industry in the emirate,” according to a statement from the media office of Dubai’s ruler Sheik Mohammed bin Rashid Al Maktoum.

Under the new law, United Arab Emirates’ nationals will be given the right to own land gifted by the government and freely use the property without “previous constraints” provided they pay 50% of its assessed value for permission, the statement said.

via Dubai Reforms Property Laws Amid Real Estate Slump – WSJ.com.

Prior to 2002, the government technically owned all of Dubai. Local citizens (UAE nationals) were allowed to use and inhabit land on a “gifted-tenure” basis, meaning they could occupy it but with specific restrictions about what they could build or do with the property. Seeing as they got it for basically nothing, it seemed like an alright deal. After all, sacrificing freedom for handouts was pretty standard practice in the Gulf. But come 2002, foreigners and locals alike were able to buy 99-year leases- though foreigners’ purchases were restricted to certain areas, typically the big government-run developments. The result: a gold-rush for condo flippers the world over.

Now that the market’s collapsed and many of those flippers have failed or fled, the government’s trying to monetize some of that land it essentially gave away back before 2002:

Under the new law, United Arab Emirates’ nationals will be given the right to own land gifted by the government and freely use the property without “previous constraints” provided they pay 50% of its assessed value for permission, the statement said.

So that “free” plot of land you got last decade? Well, we’ll give you permission to actually use it if you pay up, so says the Ruler. It’s not the worst way to goose a stagnant economy- locals could get a bargain and the government gets easy, instant cash. Kind of like cash-for-clunkers or a three-figure stimulus check.  Three potential problems with this scheme:

1. How many recession-pounded locals are dying to dip their toes into commercial real estate, let alone get financing to do so? To put it mildly, Dubai’s commercial property market seems a touch saturated at the moment.
2. Who’s to say how much “50% of assessed value” actually is? Having valued dozens of Dubai properties for Forbes billionaire rankings, I can attest that this is a tricky and controversial exercise. Though a 50% market decline is the most commonly accepted stat, other analysts have pegged it as low as 20% and as high as 80%. Properties are worth whatever someone is willing to pay- which in many cases, is nothing.
3. At most, this will provide a short-lived revenue bump to the strapped emirate. If Dubai is serious about rebuilding their treasury supplies, here’s a crazy idea: taxes. It won’t be popular but maybe that whole no-corporate-or-personal-income-taxes idea should best be viewed as a great marketing ploy. One whose offer has just expired.

To put Dubai’s conundrum in comparison, let’s once again compare the poor state to Abu Dhabi. The very same day Dubai announced their odd offer/desperate request, Abu Dhabi’s Ruler issued this smug announcement:

President His Highness Sheikh Khalifa bin Zayed Al Nahyan, has ordered distribution of 800 residential plots to the UAE nationals in Abu Dhabi, Al Ain and Western Region to ensure social and family stability.

Sheikh Khalifa’s gesture reflects his keenness to provide good living conditions for each citizen as per the higher national goals within the framework of communal solidarity and social stability.

via Khalifa orders distribution of 800 plots to UAE nationals.

That’s right- HE Al Nahyan is giving away land for free, just because he can. NB: the offer is only extended to residents in those specific regions. Sorry Dubai. In this regard as well, you are on your own.