Wednesday, June 18, 2008

Rental Analysis



Sorry everyone for not writing in awhile. I realize this is a new blog and a lot more posts are needed to gain your attention and respect before it becomes acceptable for me to succumb to long sabbaticals and disappearance acts. The reason though it took a while was that I really wanted to focus on and publish a small research that I've been working on.

You see, I am in financial markets and investment. That means money, numbers, and economics. So I wanted to do a little digging that involves my better honed, albeit geeky, skills to see exactly how far the financial figures are cooked here in the UAE, and how bad things have become recently (11.1% inflation my @$$!!)

Anyway, below is a tabulated chart of my findings (I could not, for the life of me, manage to get a proper table in here, so I resorted to the old "print screen" and save as a GIF file trick):

- The salary data are median salaries collected indirectly through several agencies, and represent a sample of at least 10 people out of each country for each job listed (So at least 30 people of each country were tabulated).

- The rents data were collected directly from various sources, mostly classified listings and real estate agencies. This one is what took most of the time. Data were also collected for Singapore, Zurich, Sydney and Chicago, but were not included as it was not complete (Mostly salary figures were hard to collate and match).


click on the figure for a clearer read


So what are some of the conclusion of this small research:

1- That despite having the lowest income across the board, Dubai has the highest minimum rent out of all those major cities of the World, especially in studios. What this means is that even though all major cities have quite expensive penthouses and Villas, they all present OPTIONS of lower rent for those without great means to live in those cities, supplying their economy with a vibrant middle class, which strengthens the consumption spectrum and creates a solid small and medium enterprise base. It means that even in the most expensive city in the World like Tokyo, you DO have the option of landing a $500 a month studio. A 10% lower limit of $950 per month did not exist in ANY city checked, this is the HIGHEST in the World, a serious issue that has to be handled if Dubai expects to grow its community and economy and attract more businesses to fill those rising office and residential towers.

2- Dubai was the only city out of all checked (with the exception of Jeddah and other Saudi cities though still not even close to being as widespread as in here), that had the abominable quarterly to annual rent payment system. Right now more than 60% of offered properties demand single payment for the whole year. In addition to being the only city that now bans sharing and regulates carpooling with heavy fines, this must be one of the biggest cash-flow challenges facing individuals here and a needless hurdle to prosperity.

This is actually where the numbers cannot match: The best (legal) option a person can find for accommodation is around $4000 (1000 for security deposit and 3000 for three months on a cheap $12,000 a year studio), yet the average monthly income for an average 5 year experienced office manager or accountant is $2,500 (MANY take less, some a LOT less). This way, it will take two months for a new recruit to pay the rent while eating one meal a day and sleeping on the cold hard floor as they can't afford buying or even renting furniture at this point, and the third month will have to be all saved to pay the next quarter's cheque of $3000!!

How exactly is it that the dishdashas-that-be (that term is on loan from Secret Dubai, due credit) expect this economy or society to function, when university educated experienced professionals cannot huddle in a room on their own accord? Where are the billion dollar businesses going to hire its workforce from, and who are the hoards of small - increasingly useless "last-season-me-too" - shops in the hundred malls going to cater to? Sharjah is not an option thanks to the still high rents there and increased requirement of a well-maintained car, a healthy Salik account, and three boxes a day of high blood pressure and nervous trauma medicine to survive the daily commute. Sharing is not allowed anymore so that's out. A fat nest-egg to be used while setting up is kind of contradictory to the whole concept that most of them come here to CREATE a nest-egg.

Only way is banks.... hmmmm, interesting.... but errrrr..... hmmmm.... funny how that worked out........ You think?

13 comments:

Almazroui said...

Interesting analysis D.W.

you really should publish it to universities, ministries and newspapers.

(side note: my younger brother is currently studying in tokyo, japan, he lives in a 2 meter by 6 meter "apartment" and he pays around 1200 dollars for it)

S.AL.M.

nzm said...

Good stuff.

If you're not already, you should become a member of the UAE Community Blog and cross-post it there.

Rose in Dubai said...

The thing is, people want to move on in their lives. As they get better at their jobs and improve their skills, thereby becomeing more useful to their employers, they expect to have an increased standard of living. This is not unreasonable.

If they don't get the increased standard of living pretty soon one of two things happens - motivation starts to disappear and the good people move on to a place where they can improve their lives. The crappy, demotivated people stay behind because they can't get new jobs.

The question is, does Dubai want to be full of crappy demotivated people who can't move on because they can't get better jobs, or does it want the best of the best?

If it wants the best of the best, its going to have to pay for them. The best of the best have a whole world to chose from - give them a reason to chose here!

Dubai Warrior said...

Hey Mazroui,

Thought we lost you there for a while. :) I'm not sure about publishing it at universities, it's not fitted with full academic scientific research steps (they're very meticulous in methodology), but newspapers said they can't publish it as it's against a government communicated policy of encouraging economic growth.

Your brother has probably chosen an independent studio on the lower range, as the study shows there are those that go all the way above 3000 dollars per month. $500 dollar studios are common but maybe not central enough or not of decent quality, furnished studios start at 800 dollars in guest-houses (sharing kitchen with other studios) and 1000 dollars independent. This listing is an example, 1000 dollar independent furnished apartment. Can anyone find a 3500 dirham furnished studio in Dubai today?

It's a bigger advantage though for your brother not about comparing rate with Dubai but about being able to pay MONTHLY even if it's more. A lot more would be affordable at monthly rent than annual or bi-annual payments.

But above all, basic sense shows that there is sound economical reason for such high rents over there, and that is a combination of two factors:

1) In Tokyo, Singapore, and Hong Kong there is a large native population that can more than fill all the properties. Expats form less than 30% in those cities, and if they leave, the natives who work for hundreds of billion dollar national businesses groups will always more than fill the void and will be willing to pay the high rent thanks to the strong income. Tokyo has 12 million citizens, and Japan totals above 125 million over the country. Hong Kong, Singapore, New York and London all have large native populations desiring to build lives in their major cities. Dubai has 250,000 citizens out of around 2 million population now (90% expats!!), and the whole country has less than 1 million citizens, most of whom DON'T like this city's lifestyle because it doesn't match the Emirati culture, so if expats leave, few will fill their place, but never the whole void.

2) In all those cities, space is LIMITED. As in nowhere else to grow the city. Hong Kong and Singapore are islands built to the maximum, Tokyo is absolutely closed and has nowhere to go. So everyone compete for the limited space left. Dubai has all the empty land it can ever want to expand, both towards Jebel Ali and deep inland towards Al Ain. There is no reason whatsoever for properties to have exorbitent prices.

Based on this and from the authority of my profession I am giving this professional conclusion that might be unpopular albeit true:
Real estate in Dubai is over-inflated by other factors non-related to actual demand or long-term actual supply limitation, and therefore it has formed an inflationary bubble that WILL burst and leave thousands of empty property units and millions in lost value as prices crash to normal.

You probably did NOT hear it here first. :)

Dubai Warrior

Almazroui said...

That is true, the payments are made in a quarterly fashion. they have communal kitchens and living rooms in specialized unit built for students. but i just wanted to bring to your attention the relative size of the apartments in their given countries, i know new york has half-decent apartments (size-wise that is) but i am not sure about london. in japan, its common for singles to live in such a small place. but my brother is not complaining. the dormitories (or student houses as they call them) at tokyo university are considered to be among the more livable.

There is a saying in Arabic that goes like: "رب ضرة نافعه". transliteration: Ru'ubba Dha'rratin Nafi'ah.

Basically what that means (in the context of what is discussed here) it means: even in the most troubling of times, we could gain benifit.

Maybe if/when the bubble bursts, there would be a void that needs to be filled, or simply just a fertile ground for 'benificial' change would occur as a result of this precieved 'harm'.

Thank you for all the trouble you've gone through to compile, analyze and present your reseach and findings. Please continue to post such informative topics for the benefit us all, your loyal readership :) (also, personally i do find these topics more interesting than scandals... well atleast *sometimes* i do :P)

PS: Why are the prices so high then? Is it because of the 16% inflation? or just mass greed?

S.AL.M.

Almazroui said...

Ah, sorry for the typo!, it should be 11% not 16%

S.AL.M

Dubai Warrior said...

You could not be more right Mazroui with the Arabic saying. A market correction or a recession is more than beneficial right now. Jim Rogers, one of the World leading economists and financial analysts (one who actually made money USING his knowledge), always says: "Recession is a good thing, it washes away the excesses so that the country can build on a more solid base".

The reasons it shot up like crazy are many, but one of the most leading is high liquidity combined with EVERYONE's desire to speculate on the real estate, setting up what is called a market "BARR" pattern. Explaining:

Every time I met someone who bought property he says they're "investing". When asked whether they're aware that there needs to be someone else who really wants the property at a higher price to USE, in order for that investment to make sense, I usually get a blank expression. Most of the investors (and there are so many who bought floors, clusters, multiple units) seem unaware of the finite number of possible people willing AND capable of footing more than a million dollars in buying a property in a country they don't belong to, at best would be a temporary base of business or leisure. The huge rise continued primarily because of each one expecting each other to buy from themselves, and basing their asking prices today on what WILL become tomorrow, and using price indications that they heard someone brag with. "Oh I just sold my Villa for a tonne of money" and the light comes on in EVERYONE's head at the same time "Hey, ME TOO!"

At current prices and with the limited lifespan of the properties built, it's not feasible to buy an office nor a residence. No market can continue functioning with benefits going only to one side. Every deal has two sides and no one will agree to being the losing non-benefiting side for long. As markets climb based on speculation on the speculation as mentioned above, the value proposition hits a tipping point where it's just plain too much and everyone stops buying all of a sudden. That's when the correction hits in as ALL speculators realize TOGETHER that no one is buying anymore, and they race to sell first, because if they don't they will be stuck with the service charges and the unmanageable mortgage and the prices that will just go even lower.

That in financial markets is called BARR pattern, we see it so many times in different markets including commodities, forex and stocks. The "Break And Run Reversal" is the manifestation of human over-expectation and group realization of error. In short, it's observed as a steady increase in prices before they break away and run really high very quickly, but strangely enough that's exactly when they stop and then start falling to very low levels.

That is what might happen, which is not very bad news honestly. yes many people will lose so much money, but overall it's just a transfer of money that moved from later speculators to older ones who got out early. The available properties will be cheaper, landlords will race to fill them and might go back to actually courting the attention and commitment of tenants by offering great service. A lot of people would have learned some valuable lessons, and after the lost jobs (thousands in the real estate and construction business), there will be growth again and APPRECIATION to good jobs, and appreciation to customer's money.

So what's the problem or danger? Why shouldn't we then just shut up and wait for it? The answer is that the correction or recession can be too hard because of the earlier extreme and loss of faith, that the recession turns to DEPRESSION, which is just plain bad. That can happen when the empty units are way too many, and the closed businesses withdraw too much, it triggers an avalanche effect on suppliers who need to close as well because of not enough business and more and more people fired, more and more people leave more and more empty property units. That's how ghost towns are created, and honestly Dubai is in no structure neither socially nor financially (being at the end of its oil reserves) to withstand one of those without serious damage (Economically restarting a depressed city without an attached citizen population with no where to go is harder than restarting the frozen core of the Earth without that movie submerger and a nuclear device)

Let's hope we don't get there.

Almazroui said...

Thank you very much for your meticulously detailed and informative reply D.W.! Not only did you answered my question, but also you anticipated my follow up question of 'what should we do to solve this problem' and answered as well. For that please accept my sincere gratitude.

Alas, my understanding of economics is tentative at best. As it was my wish that we could debate this with you further. Regardless, its all good, it would take me awhile to digest all this information anyway :)

You really made a good decision starting your own blog, it would really have been a shame to have not done so, such talent should never be withheld! I humbly urge you to reconsider publishing this information in the universities at least (i could look up their p.o. boxes for you)

I look forward to reading new posts on your blog, keep up the good work mate :)

S.AL.M.

Zane said...

Great stuff there mate. Loved the BARR correlation.
Keep up the good work.

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