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Real Estate Risks in the Middle East   Term Paper ID:41912 Click to get this paper

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Paper Abstract: This paper is the literature review of a paper on real estate risks in the Middle East and more specifically in Kuwait, identifying the many factors that pose risks and focusing on the real estate bubble and what has promoted its development. Paper Introduction: Real Estate Risks in the Middle East Literature ReviewLiterature Review IntroductionAmong the risks currently prevalent in the Middle East this paper focusesprimarily upon real estate risks In this chapter the state of MiddleEastern real estate and Middle Eastern real estate risks will be detailed and the real estate bubble will be examined in detail The chapter willdiscuss the factors that precipitate and constitute a bubble what economicindicators signal the development of and measure a bubble what makes abubble volatile and why it Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. This follows on the sale of Merrill Lynch toBank of America and the demise of Lehman Brothers (Anderson, Dash, &Sorkin, 2 8), with Washington Mutual close behind as it fell 13% onSeptember 18 after losing $3.3 billion in Q2 (Aversa, 2 8).In a global economy, these kinds of critical events cannot help but affectnations elsewhere in the world, even those that are not directly affectedby the U.S. One thing is clear, though; real estate bubbles are becomingmore common, not just in the Middle East, but around the world.2.3 Overview of Real Estate BubblesViewed from a global perspective, the real estate bubble in the Middle Eastis part of a larger trend. The assessor who came toverify the property for the Bank of Jerusalem valued the apartment at only$5 , , but the buyer wanted the apartment anyway, even at an inflatedprice (Mirovsky, 2 7). Moreover, salvaging that bubble, argues oneeconomic analyst, is "the macroeconomic equivalent of pushing down on badlyapplied wallpaper. housing collapse spreads overseas,' InternationalHerald Tribune, (Apr 14), viewed 18 September 2 8,.McGreal, R 2 7, 'Housing Bubble Like Badly Applied Wallpaper,' Raise theHammer, (Apr 17), viewed 18 September 2 8,.Middle East Monitor: The Gulf, 2 7, 'The Cap Fits,' vol. This is an inexact science at best, with analysts often predictingthe bursting of a bubble well before it occurs or missing it until after ithas happened. Ghazalyasserted that "A bubble is where a majority of buyers are buying overpricedproperties and that is not happening," arguing that the average rate ofproperty appreciation, 15%, was what was being seen on average in mostareas" ("Is a real estate bubble looming?," 2 5). 49, EbscoHost, viewed12 August 2 8,Kaganova, O, Al-Sultan, F, Speakman, J 2 5, 'Overview of Real EstateMarkets in Kuwait,' Journal of Real Estate Literature, vol. It is all based on relativevaluations...comparison rather than fundamental analyses" ("Is a realestate bubble looming?," 2 5). The U.S. The analyst points out that "With the US economy onsuch shaky foundations, OPEC countries starting to abandon the petrodollarsystem, and global oil production sliding into decline, loss of confidencein the dollar and the threat of hyperinflation will constrain thegovernment's capacity to spend its way out of the next crisis" (McGreal,2 7). Although EasternEurope's housing markets were once "sizzling," West Europeans have stoppedinvesting in properties in Warsaw and Estonia and "other former real estateKlondikes" (Landler, 2 8).Farther to the east in India and southern China, prices have stoppedclimbing and stock markets are "down sharply after reaching heady levels,"so people have less cash to invest in real estate (Landler, 2 8). The"hyperactive market" of Hong Kong apartment sales has also slowed down, andmass-market flat prices have begun to drop (Landler, 2 8). Tarek Ali, anentrepreneur and the creator of the E-Dar online real estate service,injected skepticism, indicating that there were not many statisticsavailable to prove definitively whether the market was up or down "and byhow much" ("Is a real estate bubble looming?," 2 5). 4-5, General OneFile,Gale, Apollo Library, viewed 18 September 2 8,.Sahici, E, Emlak, H 2 7, 'Foreigners buy $45 million in Turkish realestate shares,' Turkish Daily News, (Jan 3 ), viewed 18 September 2 8,.World Economic Forum 2 7, 'Middle East@Risk: A Global Risk NetworkBriefing,' viewed 18 September 2 8,. Kuwait Real Estate and the Oil MarketCo-Movements of Monthly Residential Sales with Oil Production[pic]Source: Al-Abduljader, Alostaz, & Kamali, 2 7Kuwait has three types of property-residential, investment, and commercial. 11, (March 17), EbscoHost, viewed12 August 2 8,Emerging Markets Monitor, 2 6, 'GCC Real Estate Markets: What Goes Up...,'vol. 2 , EbscoHost, viewed 12 August 2 8,Emerging Markets Monitor, 2 8, 'GCC: Dubai at Forefront of Real EstateRisks, vol. According to August 2 8 real estate sales reports issued byKuwait's Ministry of Justice Real Estate Registration and CertificationDepartment, "The performance of the real estate market in Kuwait declinedfor the second quarter" ("Kuwait real estate market for the Q2 2 8,"2 8). Although recovery from a realestate crash does take place, it can be a slow process because real estateis not a liquid commodity ("Real estate bubble," 2 8).Real estate bubbles have either existed recently or do exist in many partsof the world as of 2 7, most notably in the United States, Argentina,Britain, the Netherlands, Italy, Australia, New Zealand, Ireland, Spain,France, Poland, South Africa, Israel, Greece, Bulgaria, Croatia, Canada,Norway, Singapore, South Korea, Sweden, the Baltic states, India, Romania,South Korea, Russia, the Ukraine, and China ("Real estate bubble," 2 8).The world is, in fact, in the middle of what The Economist called "theglobal housing boom" in 2 5, terming it "the biggest bubble in history"("The global housing boom," 2 5). 13, no. recessionthat increasingly resembles a depression does not bode well for the MiddleEastern real estate market (Anonymous, 2 6).2.7 A Complex of FactorsThis paper's introduction and literature review have identified a complexof factors contributing to real estate risk in the Middle East and theformation of an asset bubble. Industrial and warehouse propertytransactions in Kuwait "consist of only warehouses and account for lessthan 1% of transacted value, while in the U.S. In New Delhiand other areas of northern India, the past year has seen prices fall 2 %,a situation that Cushman & Wakefield real estate firm director Sanjay Duttdescribes as "an erosion of confidence" (Landler, 2 8). subprime market is experiencinga rash of foreclosures and tightening credit, and analysts are concernedthat this problem could spread from California and Florida, where theproblem is greatest, to other states (Landler, 2 8). Dubai's inflation isrising at the rate of 15% per year due to rising oil prices, and an articlein The Guardian reports that "approximately 1/5 of the world's constructioncranes are at work in Dubai" ("Real Estate Bubble in Dubai?" 2 8). In mid-January 2 7, U.S. 1, (Jan),p. Borrowing costs have risen sharply, and banks are hoardingtheir cash, while Russia closed its stock exchanges for two days in a rowas its president "pledged a 5 billion ruble ($2 billion) injection intofinancial markets to stem a dizzying plummet in share prices-and quashfears of a repeat of the country's 1998 financial collapse" (Aversa, 2 8). The article points out that"This incentive-laden environment has also become attractive for foreigninvestors," who in 2 5 and 2 6 evinced interest in both residences andcommercial real estate by investing in the Real Estate Partnership, or GYO,companies traded on the stock exchanges whose share in the 1 real estatefirms traded on the Istanbul Stock Exchange reached 2 .5% in early 2 7(Sahici & Emlak, 2 7).Thus, indications are that the global real estate bubble that exists inmultiple markets around the world is as much of a concern in the MiddleEast as it is elsewhere. Such a burst bubble occurredin Japan in 199 , exerting a highly damaging effect on the Japanese economythat was followed by a more recent crash in the largest city in China,Shanghai ("Real estate bubble," 2 8). In 2 7, a mild U.S. 11 attacks" on September 16, lost an additional 45 points onSeptember 18, causing approximately $7 billion in investments toevaporate (Aversa, 2 8). Thearticle identifies Dubai as "the fastest growing city on the planet" andexplains that Dubai has "about $1 billion worth of projects underway orplanned for the [near] future" ("Real Estate Bubble in Dubai?" 2 8).NuWire Investor reports that since Dubai's real estate market opened up toforeign investors in 2 2, prices have gone up more than 2 % for single-family dwellings, a situation that NuWire contends could be "a result of arapidly growing city with an artificially depressed market closed toforeign ownership versus irrational exuberance in the Middle East's mostbusiness friendly climate" ("Real Estate Bubble in Dubai?" 2 8), As thearticle points out, "Real estate markets tend to go through booms and bustsas a result of new construction...[and] developers tend to overbuild whenthings have been going well and underbuild when things have been goingpoorly" ("Real Estate Bubble in Dubai?" 2 8).It must be noted that not everyone agrees that there actually is a bubblein Dubai. As early asDecember 2 3, a developing bubble was identified in Kuwait when the KuwaitStock Exchange hit an all-time high of 4,589.7 points, up 93.2% since thestart of the year ("Kuwait's Boom Is a Bubble," 2 3). Only afew months later, the same joint venture was offered $95.5 million per acrefor a property nearby, and that was "the second-lowest bid" offered(Pitalwalla, 2 6). Ali stated that since themortgage law had been passed in 2 1, little has happened, claiming that inits first six months of operation Taamir had issued just one loan ("Is areal estate bubble looming?," 2 5). According to the National Bank of Kuwait's chief economistRanda Azar Khoury, "There has been a lot of euphoria and private investorconfidence is high. A burst bubble "can result in many ownersholding negative equity (a mortgage debt higher than the current value ofthe property" ("Real estate bubble," 2 8). 6, p. Federal Reserve stated that "new swap facilities had beenauthorized with the Bank of Japan for as much as $6 billion; $4 billionfor the Bank of England and $1 billion for the Bank of Canada," with theFederal Reserve's action increasing lines of cash to central banks bybetween $18 billion and $247 billion (Aversa, 2 8). Thus, over-investment may occur as "private investment in realestate...may overflow those sectors that are available for privateinvestors," especially in the case of small- and medium-sized investorsthat have fewer investment alternatives available to them than "investmentpowerhouses" do constraints (Kaganova, Al-Sultan, & Speakman, 2 5). this segment makes up 8.5%of total market turnover" (Kaganova, Al-Sultan, & Speakman, 2 5). Most mortgage lending decisions are based upon this ratio ("Realestate bubble," 2 8). The declining sales and impending bubble burst are not the onlyrisks, however.In Kuwait, there are two common means of transferring the ownership ofprivately owned real estate, by sale and by power of attorney," or PoA(Kaganova, Al-Sultan, & Speakman, 2 5). A drop in oil prices could slow down the privatesector's growth and cause investors to hesitate before buying real estate(Robson, 2 7). The price to income ratio is "the basicaffordability measure for housing in a given area," usually presented as"the ratio of median house prices to median familial disposable incomes,expressed as a percentage or as years of income" ("Real estate bubble,"2 8). The deposit to income ratio is "the minimumrequired down payment for a typical mortgage, expressed in months or yearsof income," a measure that is "especially important for first-time buyerswithout existing home equity," since a too-high down payment can pricebuyers out of the market ("Real estate bubble," 2 8). Federal Reserve, AlanGreenspan, states that Spain's bubble is even larger than America's("Greenspan believes Spain has 'bigger' real estate bubble," 2 8).Greenspan explains that because Spain's bubble is "bigger than mostEuropean countries, even bigger than the one in the United States...in thatsense one would have to presume that there is more vulnerability"("Greenspan believes Spain has 'bigger' real estate bubble," 2 8).Greenspan's diagnosis coincides with news that one of Spain's leadingbanks, Cajasol, has refused to fund new construction on Spain's rural land,particularly golf course schemes ("Greenspan believes Spain has 'bigger'real estate bubble," 2 8). The housingaffordability index, although difficult to calculate, "measures the ratioof the actual monthly cost of the mortgage to take-home income" and "offersa much more realistic measure of the ability of households to affordhousing than the crude price to income ratio" ("Real estate bubble," 2 8). The Median Multiple "measures the ratio of the median house price to themedian annual household income," a measure that "has historically hoveredaround a value of 3. Merrill Lynch predicted in 2 6 that "the Indianrealty sector will grow from $12 billion in 2 5 to $9 billion by 2 15"(Pitalwalla, 2 6). Amjad is"looking for opportunities in the residential sector," and Omniyat is readyto unveil a new 1.5-million square foot residential waterfront developmentin October at the Cityscape exhibition" ("Omniyat CEO," 2 8).Amjad's opinion not withstanding, the vast majority of the literatureconcurs that there is an ever-increasing real estate bubble in the MiddleEast, as well as in a number of industrialized nations around the world.In Turkey, too, analysts are identifying a growing bubble.A year ago, the beginning of a bubble in Israel was noted by analyst ArikMirovsky. Labeled "the mostexciting real estate market in Asia" in 2 6, India's real estate bubblehas grown quickly since then (Pitalwalla, 2 6). By April of 2 6, land prices in India had risen 3 % to 1 %, andreal estate stocks had gone up as much as 2, % (Pitalwalla, 2 6).Recently, the International Monetary Fund published its forecast for 2 8'seconomic growth, warning that "the malaise could extend into 2 9," aportent of more bursting bubbles to come (Landler, 2 8).2.4 The Bubble in the Middle EastDubai has been the focus of concern in the Middle East with respect to thereal estate bubble. 6, p. Realestate bubbles occur periodically in real estate markets at the local orglobal levels and are "characterized by rapid increases in valuations ofreal property such as housing until they reach unsustainable levelsrelative to incomes and other economic elements" ("Real estate bubble,"2 8). 5, viewed 12 August 2 8,Mirovsky, A 2 7, 'The Beginning of a Bubble?," Haaretz.com, (Jan 1),viewed 18 September 2 8,.Pitawalla, YA 2 6, 'Indian real estate: boom or bubble?,' Fortune, (July5), viewed 18 September 2 8,.Robson, V 2 7, 'Time to adjust: with the oil markets leveling off, the sixGCC states will have to work even harder to deliver continued growth.However, some sectors could benefit from a let-up in activity,' MEED MiddleEast Economic Digest, vol. Moreover, thecrisis in the United States will undoubtedly affect the economy at theglobal level, as evidenced by the fact that "The Federal Reserve, andcentral banks in Europe, Canada and Asia, pumped as much as $18 billioninto money markets on Thursday [September 18, 2 8] to combat shock wavesfrom the worst financial upheaval since the Great Depression of the 193 s"(Aversa, 2 8). Even then, the Reserve Bank of India was concernedenough about an asset-price bubble to raise the real estate loan riskweightage, causing mortgage rates to go up from 7.5% to 9.5% (Pitalwalla,2 6). 17, no. The Dow Jonesindustrial average, which suffered "its steepest drop since the days afterthe Sept. Parliament is in debates over "a series of populist wageprotection measures" intended to offset this, "the most prominent being aplanned TD5 ($43) increase in the monthly wage of all state employeesearning less than TD1 ($86 ) a month" ("Kuwait: Real Estate Losses,"2 8).By April 2 5, speculation that Kuwait might be entering a bubble was beingcountered by insistence that no bubble existed. Hajaj predicts that land prices inthose areas will likely reach as high as $3 , (Mirovsky, 2 7). AsFigure 3 indicates, however, co-movements of monthly residential sales withoil production show elastic demand for residential real estate comparedwith less elastic demand in the oil market, thus documenting a morevolatile market for residential sales and a less volatile market for oil(Al-Abduljader, Alostaz, & Kamali, 2 7).Figure 3. or less, but in recent years has risen dramatically,especially in markets with severe public policy constraints on land anddevelopment" ("Real estate bubble," 2 8).Despite this variety of measures, accurately identifying a real estatebubble is difficult and takes time, as does predicting when the bubble willburst. AshrafGhazaly, the Managing Director of Coldwell Banker Egypt, also stated,"There's no bubble" ("Is a real estate bubble looming?," 2 5). Even more importantly, "these high prices represent significantwealth accumulated by property investors, so any moves to adjust the marketmay have serious negative economic consequences, in terms of (1) wealtheffects on consumer spending, (2) bank lending and viabililty, and (3)general political and economic stability" (Kaganova, Al-Sultan, & Speakman,2 5).In the Middle East as a whole, real estate risk is tied to the oilindustry, and "after burning ahead on their oil income for the past fouryears, the Gulf states now face a double whammy of falling oil prices anddemand" (Robson, 2 7). The complexity of real estate risk inthe region is described, and the difficulty in quantifying and controllingthe bubble is clarified.Given this complex of interrelated and synergistic factors, it ischallenging for the Kuwaiti and other Middle Eastern people to develop aresponse to the real estate bubble that can ensure their relative safety inthe face of an uncertain world economy and provide a path for preventing arecurrence of the real estate bubble once it bursts. The International Herald Tribune reported inApril 2 8 that "The collapse of the housing bubble in the United States ismutating into a global phenomenon, with real estate prices down from theIrish countryside and the Spanish coast to Baltic seaports and even inparts of India" (Landler, 2 8). The U.S. 51, no. Alaa Saba, chairman ofBeltone Asset Management, stated, "The problem with real estate is that itis very difficult to evaluate. Using a valuation component thatmeasures "how expensive houses are relative to what most people can afford"and a debt, or leverage, component, that "measures how indebted householdsbecome in buying them for home or profit," the state of a bubble can beapproximated ("Real estate bubble," 2 8).Housing affordability measures such as the price to income ratio, thedeposit to income ratio, the affordability index, and the Median Multipleprovide insight into how affordable houses are in the current market ("Realestate bubble," 2 8). More specifically,the chapter will look at the current real estate bubble in the Middle East,with particular emphasis on Kuwait, ending with a final look at themechanisms of real estate risk in the region.2.2 BackgroundA real estate bubble, or housing bubble, exists when trade in real estateoccurs at higher prices than the houses involved are really worth. Mirovsky (2 7) points out that, "This is how areal estate bubble develops." Furthermore, as Yaacov Siso, deputy CEO atthe Bank of Jerusalem, indicates, "Economic theories cannot explainuneconomic behaviour, such as the French buyer in Netanya, and cannotforecast where the market will go" (Mirovsky, 2 7). When compared with"a more freely balanced real estate market" such as that of the UnitedStates, Kuwait's market is "dominated by transactions of multi-apartmentbuildings" (Kaganova, Al-Sultan, & Speakman, 2 5). He pointed out that"This so-called boom in real estate is difficult to quantify," evincingdoubt as to how much of the boom was an exaggeration and how much was real("Is a real estate bubble looming?," 2 5). 14, no. However, Ghazaly didacknowledge that sales had gone up roughly 85% in one year because "most ofthe unsold properties in new communities that had accumulated over the pastsix years were actually purchased in 2 3" ("Is a real estate bubblelooming?," 2 5). InternationalRealEstateInvestment.org asks pointedly,"Can rising oil prices keep Dubai's fast growing real estate market fromimploding?" ("Real Estate Bubble in Dubai?" 2 8). Now in 2 8, Kuwaitis already experiencing high levels of inflation and its residentialproperty sales have been declining since the market peaked last July; theNational Bank of Kuwait issued figures in April showing that "average houseprices...tumbled 6 % between that peak and February 2 8" ("Kuwait: RealEstate Losses," 2 8). The questionnairewill highlight the major points expounded in this paper and will then askquestions to elicit solutions that can be applied to the problem, at aregional, national, and local level. Thisover-investment, in turn, can lead to some types of real estate being inoversupply, a condition that Renaud (1997) and Mera and Renaud (2 )assert "may have a strong negative impact on the financial sector and theeconomy as a whole" (Kaganova, Al-Sultan, & Speakman, 2 5).The Kuwaiti real estate market is characterized by exceptionally highprices for land used for housing, commerce, and industry, and the highprices "have significant negative consequences for private sectorcompetitiveness," deferring return on investment and forcing people to relyupon the government to obtain their homes (Kaganova, Al-Sultan, & Speakman,2 5). PoA has the advantages ofrendering transactions faster and less expensive, but it is only valid for15 years, is not mortgageable, and is "associated with some additionalrisks," so it is mainly used for purchasing property that will only be keptfor a short time (Kaganova, Al-Sultan, & Speakman, 2 5). Amjad sees a couple of years of inflation in Dubaias "okay" but warns that "a decade of inflation is unhealthy," as the keyto Dubai's success is "long-term sustainability" ("Omniyat CEO," 2 8).Population growth is triggering new construction, and "The government isbuilding a city for five million people whereas today we have fewer thantwo," suggesting, according to Amjad, that "whatever is supplied now willnot be enough" ("Omniyat CEO," 2 8). Pie Chart of Kuwait Real Estate Market by Type[pic]Source: Al-Abduljader, Alostaz, & Kamali, 2 72.6 Real Estate Risk in Kuwait and the Middle EastGiven the state of the real estate market in the Middle East and theimpending burst of the real estate bubble in Kuwait and other MiddleEastern nations, the real estate risk in the region is coming under closerscrutiny. Omniyat Holdings' CEO, Mehdi Amjad, dismisses speculation on thebursting of Dubai's real estate bubble, stating, "There is no bubble and Idon't believe markets will see a sharp bust. Thesedistortions arise because there are few privately owned commercial and farmproperties in Kuwait; none of the industrial properties are privatelyowned, " due to artificial constraints (Kaganova, Al-Sultan, & Speakman,2 5). 29, ProQuest, viewed18 September 2 8,.Atkinson, T 2 8, 'Dubai real estate risks sharp correction - report,'ArabianBusiness.com, (Sep 7), viewed 18 September,.Aversa, J 2 8, 'Top Banks Scramble To Ease Credit Crisis,' The AssociatedPress, AOL Money & Finance, (Sep 18), viewed 18 September 2 8,.Bradford, M 2 8, 'Infrastructure projects draw foreign insurers to MiddleEast,' Business Insurance, Vol. Can Lessen Foreign Oil Dependency,'Diverse Issues in Higher Education, vol. 42, No. Amjad feels that markets arematuring and current renters want to buy homes and that the increasingavailability of financing and mortgages is increasing the demand andcreating a shortage of such products " ("Omniyat CEO," 2 8). Attorney Yizhak Hajaj represents buyers in Tel Aviv'snew northern neighbourhoods and "rejects claims of a bubble," saying that"there is a large group of buyers that can pay these prices and is notdeterred by them" (Mirovsky, 2 7). The chapter willdiscuss the factors that precipitate and constitute a bubble; what economicindicators signal the development of and measure a bubble; what makes abubble volatile; and why it is difficult to assess the existence, severity,or relative danger of bursting of a real estate bubble. As theIsraeli bubble demonstrates, even the experts often disagree on theexistence of a bubble, what is causing it, and when it will burst.Even in Turkey, where a mortgage system is yet to be developed, aburgeoning housing industry suggests a possible real estate bubble might begathering force (Sahici & Emlak, 2 7). Moreover, "commercialproperties are strongly under-represented," and "some categories (such ashotels and land) are not present in the Kuwaiti private market at all(Kaganova, Al-Sultan, & Speakman, 2 5). "I know," he replied, "but a completely outfittedapartment where I don't have to alter a thing is convenient for my trips toIsrael" (Mirovsky, 2 7). The Kuwaiti government, he explained,had brought in Sameh El-Torgoman as head of the Ministry of Investment'sMortgage Financial Authority to boost real estate activity loan ("Is a realestate bubble looming?," 2 5). U.S. We keep hearing that thesupply and demand will be realised in 2 8 or 2 9, but while I believethat demand will become less extreme, it will continue to outweigh supply"("Omniyat CEO," 2 8). Moreover,Kuwait's real estate market infrastructure is somewhat "underdeveloped andfragmented" in that it has no real estate professional organizations thatbring together the real estate profession (Kaganova, Al-Sultan, & Speakman,2 5). 12, no. 2 , viewed 12 August 2 8,Euro Property, 2 5, 'Opportunities and Knocks,' p. Rental housing rates stand at 16.1%, "the mostrapidly rising element of the consumer price index" ("Kuwait: Real EstateLosses," 2 8). A comparison between current levels and past levels thatproved to be unsustainable and led to a burst bubble can enable economiststo make "an educated guess" as to whether a real estate market is in abubble ("Real estate bubble," 2 8). He boldlystated, "Today I believe real estate is the most secure asset that you canhave in your portfolio" ("Is a real estate bubble looming?," 2 5).Not everyone agreed with the no-bubble assessment, however. 11, (June 19), p. economy and product consumption. In the Middle East, where theU.S.'s consumption of 6.3 million barrels a day of oil from the PersianGulf region is a significant contributor to the economy, a U.S. When people see oil prices come down, they have anexcuse to sit on the side" (Robson, 2 7). Siso identifies the2 7 prices of $15, per square meter as being "beyond the peak realprices" and insists that they "reflect the beginnings of a bubble"(Mirovsky, 2 7). Experts predict, in fact, thanin some countries, such as Ireland, the bursting of the real estate bubblewill be even more damaging than in the United States, "with the possibilitythat the downturn could turn into wholesale collapse" (Landler, 2 8).Leading economist and former chairman of the U.S. According to a 2 7 article in theTurkish Daily News, the "demand for residences" has caused the real estatesector to "take a big leap forward in the past two years," resulting in6 , people becoming homeowners in Turkey thanks to decreased bank loaninterest as low as 1% (Sahici & Emlak, 2 7). The Economist estimates that "the totalvalue of residential property in developed economies rose by more than $3 trillion over the past five years, to over $7 trillion, an increaseequivalent to 1 % of those countries' combined GDPs" ("The global housingboom," 2 5).Economists use a variety of indicators to identify bubbles before theyburst, among these financial ratios and economic indicators that revealwhether the homes in a particular area are fairly valued ("Real estatebubble," 2 8). When the bubble becomes unsustainable, prices suddenly collapse andreturn precipitously to their real levels, a phenomenon referred to as the"bursting" of the bubble. Real Estate Risks in the Middle East: Literature ReviewLiterature Review2.1 IntroductionAmong the risks currently prevalent in the Middle East, this paper focusesprimarily upon real estate risks. Although theprinciple driver of inflation in cities such as Abu Dhabi and Dubai hasbeen "the shortage of residential and commercial properties in thefederation," the governments there have imposed a 7% rent increase cap inan effort to bring inflation under control (Robson, 2 7).Recession in the United States is not beneficial to the Middle East'seconomy, either, as money-restricted Americans are conserving fuel andspending less to save on costs during the economic crisis. Of these three types, by far the majority of Kuwait's real estate isresidential, as indicated by the chart in Figure 4.Figure 4. Two primary economic factors werethought to contribute to the impending burst-the banking system and the oilmarket-both of which were feared would lead to a breakdown of the market(Al-Abduljader, Alostaz, & Kamali, 2 7). Instead, Ghazaly urged people to buy real estate,contending that supply and demand were "evenly aligned" and that Kuwait was"still at the beginning of the upward curve" and would continue toappreciate" " ("Is a real estate bubble looming?," 2 5). In addition, Spain's property prices havedeclined by as much as 13% in some areas, and by March 2 8 there werealready 155 cases of homeowners defaulting on mortgage repayments -"halfthe total number of cases registered in the whole of last year" ("Greenspanbelieves Spain has 'bigger' real estate bubble," 2 8). crude oil prices also fell from a summerpeak of $8 per barrel to a 2 -month low of $55 per barrel (Robson, 2 7).Although OPEC cut production, "declining demand for oil appears to be along-term trend," and "consumers are belatedly adjusting to high fuelprices that have lined the pockets of Gulf producers" (Robson, 2 7).Another risk issue in the Middle East is the asset bubble. In addition, it hasidentified rising producer costs, soaring property prices, an exodus offoreign workers due to high rental costs, rampant real estate inflation,and the impact from and upon the global economy. Standard & Poor released areport relating Kuwait's real estate market risk to a "lack oftransparency" in real estate information and "investment illiteracy amongtraders," as well as highlighting "the limited number of credit facilitiesalong with the urban concentration [that] would lead to an inflating and anambiguous real estate market" (Al-Abduljader, Alostaz, & Kamali, 2 7). Saba argued that Kuwait was not in abubble, terming the situation "a huge pent-up demand that was not being metbecause a lot of projects were at a standstill for years and they are justnow starting to move" ("Is a real estate bubble looming?," 2 5). winter andchanges in commodity markets led the International Energy Agency to reviseits January forecast for global oil demand downward to 85.8 million barrelsper day, a 16 , -barrel-per-day drop from the average in 2 6 (Robson,2 7). 3, pp.289-3 2, ProQuest, viewed 18 September 2 8,.Kuwait real estate market for the Q2 2 8 (Zawya), 2 8, PGS Real Estate,(Aug 24), viewed 18 September 2 8, .Landler, M 2 8, 'U.S. Further, the current housing bubble's"rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2 ," a sign that bubble economies are synergistic("The global housing boom," 2 5). The recovery approach developed herecan then be appropriated and adapted for use in other regions to addresswhat is rapidly becoming a common problem.References'Greenspan believes Spain has 'bigger' real estate bubble than US' 2 8,PropertyWire, (Apr 1 ), viewed 18 September 2 8,.'Is a Real Estate Bubble Looming?.' 2 5, Zawya, viewed 18 September 2 8,.'Kuwait: Real Estate Losses' 2 8, Zawya, (July 4), viewed 18 September2 8,.'Kuwait's Boom Is a Bubble,' 2 3, AMEInfo, viewed 18 September 2 8,.'Omniyat CEO dismisses Dubai property "bubble,"' 2 8, Dubai Property News,(Jan 29), viewed 18 September 2 8, .'Real estate bubble,' 2 8, Wikipedia, (Sep 4), viewed 18 September 2 8,.'The global housing boom,' 2 5, The Economist, (Jun 16), viewed 18September 2 8,.Al-Abdujader, S, Alostaz, RZ, Kamali, B 2 7, 'Kuwait Real Estate Report:Market Analysis 2 7,' Coast Investment and Development Company KSC, viewed18 September 2 8,.Anderson, J, Dash, E, Sorkin, AR 2 8, 'Lehman Files For Bankruptcy;Merrill is Sold,' The New York Times, (Sep 14), viewed 18 September 2 8,.Anonymous 2 6, 'Study Details How U.S. He recounted that a Frenchman evinced interest in purchasing aNetanya apartment that overlooked the sea, and the owner was asking$6 , for the property (Mirovsky, 2 7). From the UnitedStates to other countries around the world, the real estate bubble isspreading like "contagion" (Landler, 2 8). hedge fund FarallonCapital Management and its joint-venture partner Indiabulls purchased an 11-acre property in Mumbai in March 2 5 for $54.5 million per acre, an actiondeemed "an act of idiocy" by local developers (Pitalwalla, 2 6). This research combines toproduce a picture of real estate risk in the Middle East as a composite ofdisparate yet related factors, any one of which can exert an impact on thestatus of the real estate bubble. Ali contended that although some priceshad skyrocketed, on average they had only risen 15% to 18% per year loan("Is a real estate bubble looming?," 2 5).By 2 7, concerns were growing about the real estate market's rate ofgrowth, and investors began anticipating that the bubble would burst (Al-Abduljader, Alostaz, & Kamali, 2 7). 23, no. This fragmentation extends to a lack of training programs and"transaction-level real estate information," and the only summarystatistics available are published by the National Bank of Kuwait and someother lending institutions (Kaganova, Al-Sultan, & Speakman, 2 5).Furthermore, "the Kuwaiti market has some substantial abnormalities anddistortions" (Kaganova, Al-Sultan, & Speakman, 2 5). As elsewhere in the Middle East, Kuwait is also in the midst of areal estate bubble that could burst in the near future.2.5 The Bubble in KuwaitKuwait has not been exempt from the global real estate bubble. The paper has identified geopolitical risk,historic highs in real estate prices and commodities, the role of foreigninsurers in insuring real estate transactions that locals are unable toinsure, the increasing size of mortgages, and the dearth of risk managerswho might help the region better manage its risk. 4, (Jan 26), pp. In this chapter, the state of MiddleEastern real estate and Middle Eastern real estate risks will be detailed,and the real estate bubble will be examined in detail. The bubble will simply pop up somewhere else down theroad" (McGreal, 2 7). If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.