FULLY ASSET BACKED REAL ESTATE COMPANIES: Lessons to be learned from Dubai’s recent real estate industry Crash Landing

I feel its important if I explain what asset-backed security is, so all readers would have a better understanding of the subject being written. In the past 30 odd years, financial markets have not just grown, they have ventured into many directions, to enable investors choose from a diversified mix of opportunities – while I am making readers understand the concept of asset backed investment, it may not be a bad idea to also look at one of my earlier blogs re MARGIN TRADING, which would give a very clear picture as to how one should differentiate the 2

Very briefly, margin trading is a facility, that your broker usually facilitate to make you trade with a significantly bigger number compared to what you have as your own investment. For example, if I have $5,000 of my own, and I wish to invest in property or go to the stock market, I could easily trade with assets worth upto 10 times of my money, that could give me a trade size of $50,000 – well, it does look too good to be true, but there is another side of the coin too, downside is, if your asset goes down 10% – you lose your entire capital – no in all fairness, lets agree, not to use the terms “profits & losses” – it is only fair, if we restrict ourselves to use “winning or losing” – my humble request to small investors, please don’t gamble your savings – margin trading is only good for people, institutions with deep pockets who have capacity to take delivery in the event market crashes – in case of small savers, we resort to squaring the deal in panic and end up losing our equity (partly or fully)

Coming back to asset backed securities – as the term is suggesting, we get what we pay for – meaning if we have $10,000, we buy assets worth this much only, again, it is critical that we must know/ensure if an asset does exist before we put in our money – let me give couple of examples, what if I buy shares in a company at the stock market, whose share is trading at $1.50 a share, now, this could be genuine reflection of company’s worth or could be result of smart play by brokers, irrespective of company’s actual book value – so this is a bit tricky for new comers in the stock market

As far as real estate industry goes, it is rather straight forward, we can see if the project is actually on ground or not, and if the developer’s company is over-leveraged or not (this is a completely new subject which I will explain in a separate blog) – we have to look at 2 scenarios, a) physical position of the project being looked at, in respect of civil works, various government approvals, builder’s financial standing, his name’s general reputation, past projects delivered etc, and b) we try to dig deep to find out if builder has fully paid for the land, check if the land title is free from claims, and if he has lined up financial resources to fund the construction, rather than depending on only investors money, because if he has not put in his share of capital in development in addition to his capital in the land, it gets risky to remain afloat in this situation

Asset back situation, in real estate is that we have complete match-making scenario, meaning there must be a tangible asset against each cent being invested, so there is no erosion of seed capital in a crisis situation, unlike what we had witnessed in Dubai and neighbouring small emirates like Ajman, where people were investing in high rise offices, flats, exchanging files in speculative trades, merely on a piece of land where the builder has not even started digging for foundation. Now the question is, are we going to blame the market, the broker, or the builder? lets be honest! investors knew it was a gamble, their greed at the cost of losing their livelihood, as most of them had borrowed money from banks against their salaries. Thousands of small investors had even left the country, leaving behind their cars at the airport! this is most tragic for their families, children losing their homes, schools, friends – no matter how harsh we could get on their parents




Margin Trading & Asset Backed Investments: Small Investors inability to grasp the Concept

No matter how hard one tries, a greedy mind is not easy to control. Besides, you start losing sanity & rationale the minute you fall prey to greed & hunger to make quick money, through whatever means one could think of

Dubai’s recent nose dive in real estate industry is a classic example, how do we explain a situation, where a real estate project is being sold to investors, at a time when the builder has not even started digging land! and offices, flats on the proposed 60th floor are being traded on paper? isn’t this being suicidal? I know friends who were amongst millions of other investors who lost money and some had lost their life long savings

The question is, is it really fair to blame the broker? for not creating enough awareness on the risk factors attached with speculative trading? I would choose, not to blame brokers for a simple reason, that it is there bread & butter to invite investors, trade over & over again. And in all fairness, one tends to get casual when there are hundreds of customers waiting to be attended, no matter how harsh the regulations are, brokers job gets finished once he writes a one small disclaimer, telling his investors to take due care as investments can go up or down

The question remains, how does one control greed? and if not curtailed in the beginning, it changes into gambling, where people take another step to reach the “final nail in the coffin” situation, when they start borrowing against an already over leveraged equity that was hardly 10% of the total portfolio and later on goes down to even 2-3% if one goes ahead to borrow further. It means that the minute your portfolio goes down by 3%, you are gone completely

My request to small savers, please be very careful in dreaming such fantasies. Don’t put your family in a never win situation

Its good to explain briefly, the facts behind margin trading & also the benefits of asset back investments. Margin trading works well only for institutions with deep pockets, and with high net-worth individuals because if the market goes down, they have resources to avoid a panic situation, by simply paying off & take physical delivery of an asset rather than selling to settle the lost trade. They have resources to sit on that buying for weeks before market rebounds and they make an exit

On the rationale of asset backed investments, please don’t buy something which doesnt even exist, this is for all investors, irrespective of one’s financial resources because there is no tangible asset to hold on to in the event market crashes. How do you salvage a situation, holding a piece of paper that says you are the owner of a proposed flat on the 60th floor, in a situation of panic because the land itself was bought on borrowed money, and even if it was owned 100% by the builder, it cannot be worth enough to secure the size of investment that had already been injected ahead of construction. Meaning there is no recourse to such a situation, everyone walks out as losers