Middle East

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The Gulf is now crashing. Pull back, region-wide

The Middle East has been shocked by the rapid turnabout of the situation in the Gulf. “I thought it (real estate) was going to turn down 30% - but now it looks more like 50%,” said a recent correspondent.

And by the way, those stories of people who’ve lost jobs leaving Porsche at the airport are TRUE.

Why is it so bad?

• Dubai symbolically represents the follies of the real estate boom. Well sorry - the boom is over.
• Dubai is a trading centre. Trade is massively down.
• Dubai is hugely in debt, has no oil, and would be bankrupt if Abu Dhabi hadn’t lent it money.
• Oil is at US$45 a barrel. That’s hurting the Gulf countries, and there’s been a knock-on effect on all Middle East economies.

Dubai – overbuilt, low yields (4.5%-6%)
Common sense says Dubai is overbuilt. As a business hub, Dubai’s attractions can only grow – tax free, well connected, a financial and logistics centre, a transport hub. But that’s the future. Here and now – gross rental yields, surveyed before the worst recent news, had already taken an enormous dive. Now they’ll fall further, as the vast residential inventory backlog comes on-line, and expatriates leave Dubai.

Egypt – 12% yields, but political risk
We still like Cairo, Egypt. Cairo enjoys good yields in key locations, a prime example being Maadi, an upscale area catering to expatriate buyers. Apartments in Maadi typically return gross rental yields of around 11-12%. This is in the context of strong Egyptian GDP growth, partly as a result of liberalising economic reforms. Seaside property in Egypt enjoys much lower yields.

However, note that there are serious political risks when president Hosni Mubarak, now 78, dies. The Muslim Brotherhood is Egypt’s most popular political party, though not fully represented in parliament. The authorities will seek to manage the succession to prevent a Brotherhood take-over. The army will decide the outcome, but is not itself free of the Brothers’ influence.

Jordan – safety first
A second possibility is Jordan, which also has good yields. However, long-term growth has been anaemic.

Morocco – a bet on the tourist boom
As a third choice we like Morocco, which is enjoying a tourist boom. Though GDP growth has been surprisingly lethargic, the sheer volume of tourism is pushing up prices and generating growth.