Tuesday, December 15, 2009

Schadenfreude Pandemic Averted (for now)

Back in October of 2000 I was having a martini with a friend of mine at Bar 42 and we were reminiscing about the end of the internet boom. We had been to a launch party at the bar, so named for the 42 different kinds of martinis it served, for some new internet company a year before in the fall of 1999. The party had been massive and lavish. The new shareholders of whatever company had just done its IPO had spared no expense to entertain the youngsters who with hope and html were going to make them rich beyond the dreams of Croesus. A year later the bar was deserted and we couldn’t remember the name of the company that had entertained us the year before.

As it happened it took more than hope and html to pay the rent and the salaries let alone leave anything for the shareholders. So the internet bubble popped and my friend and I were drinking to its demise. At one point my friend turned to me and said, “You know Ken, I’m sooo happy the Internet Bubble is over?”

“Why’s that?” I asked, a little surprised. I, for one, missed the parties.

“I’ll tell you why. For years I had been going out in New York and as an investment banker (my friend was a media analyst at a bulge bracket firm) I was the top of the dating food chain. Lawyers and accountants were well off but boring and the media and advertising guys were interesting but gay or poor. I’d go into any bar and I’d have my pick of the ladies. It was excellent.”

“Then the internet guys show up. Not only are they interesting, reinventing the whole economy yada yada yada, they’re making more money than God and investment bankers put together. If I had a dime for every time some girl walked away when I told her I worked at an I-bank, or I got that dead fish stare when I told them I didn’t have any pre-IPO shares I could probably bring back the boom myself. Well, now that the internet has destroyed all those guys and they’re back in their tiny apartments in some outer borough we rule the roost again and all is right with the world.”

Schadenfreude. Glee at anothers’ misfortune. It was thick among the junior folks at investment banks back at the tail end of the internet boom and before the recession really got underway in 2001-2002. It wsa short lived though. As I pointed out to my friend that night we in the financial industry had been living off that internet boom for some time. Who did he think was behind the high salaries paid to media analysts? People who were interested in media and the internet that’s who and sure enough my friend lost his job shortly thereafter and moved to what he would have called a flyover state, America’s outer boroughs.

Why do I tell this story? I tell this story because it is similar to a lot of stories and thinking by people connected to Dubai. While sure enough there were plenty of creditors on the edge of their seats or trembling in fear at the prospect of squaring off against Sheikh Mo in Dubai or UK courts there was also a fair number of people who were quietly cheerleading the fall of Dubai. Why might this be?

You have to remember what it was like to live in Dubai from 2005-2009. Like New York and the Bay Area from 1998-2001 a lot of people got very rich very fast for doing things that seemed not very smart. Those people made life miserable. There you were every day, turning your cog in the great Dubai money machine. Turning those cogs was not a bad job, tax free for non-Americans, the pay was generally better than you would get in London and the work was generally easier. You could show up at 9AM and still be the first guy in, none of this 7AM meeting business people put up with in New York and London. Plus there was no minimum wage and there was a huge supply of cheap labor so for $5000 a year someone would live in your house, cook and clean for you. And it was sunny every day. Ahh yes, you were the envy of everyone back in rainy London or grimy New York. That’s the life.

But then, in every office, there was the “Off-Plan Real Estate Baron” to throw a wrench into your self-satisfaction. The Baron might have been sent to the Dubai office after some embarrassing failure in London. When he arrived he KNEW he would not be going back any time soon. So the Baron buys an apartment for $300,000 and tries to make the best of life in Dubai such as it is. Then, before his furniture even arrives, someone offers him $400,000 for it. Hello! $100,000 for just standing around? That kind of thing never happens, so he sells and buys a new apartment for $300,000 and then tries to figure out what to do with the $100,000. That’s when he discovers the magic of Dubai off plan real estate.

“Off Plan” real estate is a phrase for apartments or villas that have yet to be built. In order to finance them the real estate companies sell them forward on an instalment basis. You put down a deposit and then over time as the construction proceeds you pay in instalments and are fully paid up by the time you take delivery. Of course as the thing doesn’t exist yet and may not actually be built the deposits can be quite small which means the leverage can be quite large. So once he discovers this The Baron is on his way. He puts down $100,000 for an off plan apartment worth $1,500,000. A few months later a real estate agent calls up and says “hello Mr. Baron, I have a Russian gentleman who would like to buy your rights to that apartment for $1.7 million. He’ll take over your instalment payments and replace your $100k deposit and pay you $200k in cash, what do you say?"

What do you think he says? He says "HELL YES!!!" He takes his $300,000 and buys three more off plan apartments and is off to the races. You can see where this is heading. The Baron works in the same office as you. Makes the same salary and bonus as you working for your company and is probably not as good at his job as you are. Behind that is making a huge fortune in Dubai real estate. This is when you start to notice things about him you don’t like that might not have occurred to you otherwise. He’s socially awkward. He has poor taste in clothes. He’d never survive in London, not like you would anyway.

That may be but he sure seems to be making it in Dubai. Dubai was an outstanding place for conspicuous consumption. You have a housekeeper he has a gardner, a cook, a driver, a maid and if he’s got children he’s got a nanny for each child and a manager to manage them. You live in a nice villa, he has a huge one or a massive apartment overlooking the Palm. You’re taking a cab to work because you don’t want to deal with the traffic, he’s driving his Ferrari because... he can. If you’re single you can’t get a date to save your life aside from the occasional low hanging tourist and he’s going home every night with a different Russian girl so attractive that if you met her in London you could never go out with her not because she wouldn’t give you her number (which she wouldn’t) or because you can’t get into the clubs she goes to (which you can’t) but because you are not hip or rich enough even to know where those clubs are.

But you have one thing on him and that is the certainty that sooner or later it will all end in tears. For Dubai, maybe for the Middle East, but sure as hell for The Baron. You’ve probably even told him this yourself. Some late night over drinks at Sho Cho’s you were reminding him that 450,000 luxury apartments were under construction at that very moment for a city that had 1.3 million residents 800,000 of whom were migrant labourers from the subcontinent and therefore unlikely to be in a position to pay the offer for a luxe 2 bedroom with a view of Dubai Marina. You might have reminded him that every year Dubai was adding as much office space as there was in the whole of San Francisco and the vacancy rates were high and already climbing. You would be sure to remind him of the open secret that Dubai had no oil and the whole thing was built on a mountain of debt that would sooner or later come crashing down on him and everyone else who was caught long Dubai real estate.

Depending on what kind of guy he was he might take up the gauntlet. He might make a bunch of arguments about the Dubai miracle. He might tell you that there would be 60,000 investment bankers working in the DIFC, about how 2 million retirees from the UK would move there, about how the price of oil was going to $1500 a barrel, or about how Abu Dhabi would never let anything bad happen. It would sound a lot like the kinds of things you might have heard in New York around Q1 of 2000. Or he might not be that kind of guy. He might just finish his martini and apologize that he could not offer you a ride home in his Lamborghini because there was a lovely young lady at the end of the bar he wanted to talk to but he would see you in the office tomorrow. You would take a cab home a little deflated. You may or may not be right, but he sure as hell was rich.

What was true on an individual level for Dubai expats was true on a national level for the other Gulf states. Abu Dhabi and Saudi Arabia were completely bewildered by Dubai and at the same time strangely attracted to it. Here they were, daily making hundreds of millions in cash money providing the world with very important hydrocarbons and no one wanted to talk about them. It was always Dubai this, Dubai that. Kuwait and Bahrain felt the same, each had been the cultural or financial center of the Gulf in its turn and wondered how it had happened that Dubai had leapfrogged them, especially when it did not have a fraction of their actual resources. If imitation is the sincerest form of flattery then Qatar was Dubai’s most sincere flatterer. It often seemed as if the strategic vision of Qatar was to be found in day old copies of the Dubai paper Gulf News. Despite the disdain in which most of the nationals of other Gulf States held Dubai I always found them eager to make an excuse to go to Dubai. It repelled and fascinated them.

Then the financial crisis hit the world and the worm began to turn in Dubai. Real estate prices came in, the off plan game was up. That said the Dubai optimism was irrepressible. This was a small bump on the road to the realization of all the great potential of Dubai. It’s region was stronger, it was not the same as the subprime crisis, Abu Dhabi was there et cetera et cetera. Then came the Abu Dhabi walk-away and the debt standstill request. Suddenly the collapse of Dubai had a timeline. December 14th followed by December 28th and the whole thing would come crashing down.

A schadenfreude pandemic seemed imminent. Finally everyone who had been right instead of rich would remain right and those who had gotten rich would be crushed under the collapse of Dubai. You could see it best in the UK press which, after drinking the Dubai cool-aid for years suddenly was indignant that such craziness could have gone on as long as it had. They called for Sheikh Mohammed to resign and whether he did or not he was about to receive his comeuppance from those other villains that the press loves to hate, the hedge funds. It was most easily seen in the press but it was everywhere, just below the surface. Glee at anothers misfortune.

But it was not to be. At the eleventh hour Abu Dhabi did step in like all the optimists said it would and saved Dubai the public humiliation of having to put Dubai World into liquidation or else abrogate judgements against it made in UK court. Dubai lives to fight and build for another day or at least until May 2010. At least as far as Dubai World is concerned. Everything else is on a case by case basis.

Personally, I wouldn’t recommend buying any off plan real estate there any time soon, but I've been wrong on that before.


Carla Sandral said...

all loving to hate Dubai... lets see how it rolls in 15 years... I am still curious. We are young and have the time, G*D willing ;-). Ken - you and I will have a coffee over this when we are 60 and only then can we truly asses what is happening now.... don't mistake a bear a for a bull just because it doesn't look right from a distance....maybe we need glasses at our age? Carla.

Gazza said...

Isn't Bar 42 called Bar 42 because it is on the 42nd floor, and the Tower itself is called Tower 42? Having said that, with all these 42s everywhere, they probably do have 42 cocktails.

Anyway, I worked in Dubai from 2003to 2009 and know exactly what you mean about incomptent colleagues making their real bucks in real estate. I bought on the way up but have held-on, so am nursing the pain (and the exhorbitant mortgage) from my new base in Qatar, who at least have their own money without having to borrow everyone else's.

Ken said...

Bar 42 was in New York, Tower 42 is in London at the top of the NatWest Tower and yep, it is named for the floor that it's on. Bar 42 in New York is no more I'm afraid.

Anonymous said...

Splendidly written and meticulously to the point...
...and the right point at that.

debazerin said...

I really like this one - feature length and style. It would fit well in the Atlantic or some other major monthly periodical. Maybe you could be the sane counterpoint to Matt Taibbi

Anonymous said...

You summarized the situation amazingly well but have missed one category of people.

Those who waited till the last and then jumped in to the Offplan game at the fag end of the rally. I think these guys got burnt the most.

I knew of a junior in my office who made close to AED 1 mn through various off-plan deals. Our Director saw the dollar signs everywhere and then proceeded to sell his villa (at a huge profit if I may add) and deployed the entire amount plus some into off-plan properties (10% down including premium and 90% due).

Anonymous said...

I like your blog. A lot. But one thing -- a friend of mine took this picture of the dusty car. You should do the right thing and attribute it to him. In the journalist world it's similar to not being given credit for a deal you've sealed in the banking realm.

Ken said...

I actually got the photo off another blog where it was unattributed andt therefore I assumed it was in the public domain. I try to take things from the public domain and don't use stock photos or other copyrighted material generally. If you tell me his/her name I'll be happy to attribute it.

Anonymous said...

announced that govt not behind DW debt. Debt tanks. Traders, AD , etc buy back in their own debt at 45-55cents. Then AD comes to the rescue after all and debt shoots up. Nice trade. nice way to pay off ther debt at 50Cents without a creditor committee. Niiicce!