Foreign Markets, Especially the Middle East GCC Region Part 2
Part (2)
One of the very first things that I earned was the power of the financial institutions in controlling market price. What is market price? Probably the simplest way to define it would be to say, “An index that measures the change in value of the U.S.(or other countries) residential housing market.” (Investopideia 2014). So the banks set the indexes for most property areas and individual property was given a value by the financial institutions asset management team. Based on these valuations, other smaller investors would follow suit and designate the same or similar prices on their own properties.
This could be good or it could be bad. For example, as a potential renter in this new market my family was dependent on me to find the best deal possible, meaning the property that had the most facilities, the best views and was within close driving distance to everything we wanted. As an expat with a wife that was here on a government contract we were allocated a housing allowance, such is the standard here and for good reason as you will understand more later. Because the banks controlled cost for the most part, and our housing allowance had a cap we were forced to look in certain area’s that we could afford. Of course the banks know this and thus set the housing prices for these areas to the maximum allowable amount to absorb 100% of the housing allowance given to the expat workers.
Why is this good? With a certain amount of internal control, (the banks and property management companies), market fluctuations were not as likely to occur and the housing market would maintain a steady increase for the investors and of course the banks. New inventory, (residential housing) would not be released, even it was fully handed over by the developer, until the banks and property management companies who controlled the new inventory were satisfied that other surrounding buildings had reached a healthy occupancy rate.
Why is this bad? The obvious response would be smaller investors have to sit on their property paying mortgages until the banks decided to hand over the development, building, or villa compound. However, what I found from personal experience with my family was the asset managers for the property management companies could and often did over-inflate prices in areas that had limited availability. They knew there would be market corrections, usually within the same quarter they assigned the inflated prices, but did it anyway. And of course the smaller investors follow suit. These inflated prices have forced our family to move three times in three years as the increased rental prices can be significant over a 12 month period.
For example, my wife’s housing allowance is 132,000 AED, this is about 33,000 U.S. dollars. This is quite a bit of money for rent even in places like Los Angeles, or New York. The first year we moved into a swanky high rise on the 61st floor that had great views of the city and Arabian or Persian Gulf depending on, well you get the point. Occupancy rates were about 60-70% that first year and the developer was running incentive programs to get the building full, like pay no commissions on the deal which were usually around 5% of the value of the rental. After the occupancy rate went up we were notified in writing and as per UAE law within 2 months of end of contract that the owner would increase rent. Of course you know by now that the owner, which was also the developer, which is owned by someone close to the head family, was probably a sheikh.
In our first year we were renting at 130,000 AED. So our
(current value increase) 170,000 -130,000 (starting value) =40,000 AED difference. Now divide 40,000/130,000 starting value =.3076 or 31% increase in 12 months. Needless to say we decided to move and keep our money for other things.
Rent is paid on yearly bases, usually in the form of a manager’s check for the first 6 months and a postdated check for the next 6. Breach of contract forces the tenant to lose 2 months’ rent, and that’s only if the landlord allows the breach. Otherwise the tenant can be forced to pay the full amount for the year, even if they have moved out. It’s punishable by civil suit and deducted from the past tenants salary, or by criminal offense which could land the tenant in jail if the landlord tries to cash the PDC and it is insufficient. Wouldn’t this be great in the United States markets? Can you even imagine having a tenant that says how much is the rent sir/mam? And would it be ok if I just write one check for the entire year?:)
What have I learned? In a nut shell, the Sheiks own and control the banks, property management companies, and major developers. We have investment zones that are 99 year lease holds in Abu Dhabi. Expats usually live in one of these 7 investment zones. Some are owners, and some our just tenants like me. Sheiks’ offices determine when to release new inventory to these investment zone markets which can be good or bad depending on your position. Rent and sales can increase based on the asset managers decision that work for the Sheiks’ offices. Smaller investors always follow suit and assign prices that the banks have assigned to their properties. I have learned that there is a lot of money to be made in Middle Eastern markets if you know how to play the game, who the players are, and work within your skill set. I hope you enjoyed this post; it was my first of many.
Cheers,
Christopher Adkins
