Dubai Property “Investors” Could Lose Everything

Not only have several Dubai developers taken large deposits and folded or vanished with the money over the last few months but now the Sheikh himself cannot afford to support his property development vehicle, Dubai World and he has cut it loose without financial support. Dubai World has now defaulted on its $59 billion of bonds with no chance of Abu Dhabi or anyone else riding to the rescue.

It gets worse, anyone with deposits paid on schemes from “Government owned” developers like Nakheel have already been badly treated when schemes are cancelled – they have either been ignored and deposits retained or at best offered six months to move to a new scheme, and not at bargain prices like the rest of the country. Effectively their deposits are lost.

It gets worse still, even where the scheme isn’t cancelled, the property may not be built for years, or ever. Finance won’t be available on the same terms as when people bought so it may make the property unaffordable from a deposit point of view and even worse the buyers are committed to prices that could now be 3 times the current “value” or worse.

It could get even worse than that – even foreign property owners who now own completed property should beware – the Sheikh has pulling the plug on supporting Dubai World may just be the beginning. Assetz has long distrusted the long time it took for the Sheikh to finally provide a form of freehold instead of leasehold and speculated it could have been because the Sheikh never really intended to offer freehold and really just wanted foreign capital to build the new Dubai and at some point foreign ownership could be revoked at the end of the leases and the value of the built real estate could be taken back.

That time may well be approaching decades sooner than we thought and foreign owned property could be taken back onto a leasehold basis (or worse) to prop up Dubai’s collapsing balance sheet….

The grand reversion to quality, the western world and well established legal regimes continues.

Dubai World’s Debt NOT Guaranteed by Government

Dubai’s government said it hasn’t guaranteed the debt of Dubai World, the state-controlled holding company struggling with $59 billion in liabilities, and that creditors must help it restructure.

“It is correct that the government owns Dubai World, but the decision when it was set up was that it should receive financing based on the viability of its projects, not on government guarantees,” Abdulrahman Al Saleh, director general of the emirate’s Department of Finance, said in an interview with Dubai TV, when asked whether the government was backing the debt. “The lenders should bear part of the responsibility.”

Dubai’s government said Nov. 25 that Dubai World would seek a standstill agreement with creditors and an extension of loan maturities until at least May 30, 2010. The announcement led to the biggest declines in Asian shares in three months last week and Europe’s worst rout since April. Investors were concerned the proposal risks triggering the biggest sovereign default since Argentina in 2001.

Dubai shares tumbled and Abu Dhabi’s stock index today fell the most in at least eight years on the first trading day since the announcement. The Dubai Financial Market General Index dropped 7.3 percent to 1,940.36, the biggest decline since October 2008. Abu Dhabi’s ADX Index fell 8.3 percent, the most since Bloomberg began compiling the data in 2001.

Nakheel Bond Suspension

Nakheel PJSC, Dubai World’s property unit whose $3.52 billion Islamic bond is due Dec. 14, asked the Nasdaq Dubai stock market today to suspend its securities “until it is in a position to fully inform the market.”

“The times of implicit support are clearly over,” said Philipp Lotter, vice-president of Moody’s Investors Service in Dubai. “In the past entities such as Dubai World certainly represented themselves as quasi-government entities, whereas there was no legal obligation on behalf of the government to support, and that has certainly shifted with last week’s announcement.”

In the prospectus for its first Islamic bond sale in October, the government said “certain strategic government- related entities of the emirate have significant borrowings which are not direct obligations of the government of Dubai.” The government raised $1.93 billion from local and international investors in the sale.