Dubai

September 2006 Hans Arthur Black

If you have the chance to visit Dubai, one of seven emirates that comprise the United Arab Emirates, I suggest you visit the Dubai Museum in the Al-Fahidi Fort. Located in the oldest part of the city, the museum is small, much like the fort itself, but it is remarkable for its collection of aerial photos of Dubai over the last three-quarters of a century, allowing visitors to appreciate how much and how quickly the emirate has grown. While the fantastic skyscrapers and extravagant hotels that have sprung up over the last couple of years constitute the present avant-garde image of Dubai, the exhibition at the Dubai Museum reveals that only thirty years ago there was very little there to speak of and as few as fifty years ago there was almost nothing. The development has not merely been astounding, it has been exponential: Dubai had a population of 20,000 in the 1950s; today it is over a million.

Dubai started to grow in the late 1950s and 60s as a regional center for trading (predominantly with Iran) and the discovery of oil at the end of the 60s greatly accelerated the process of modern development. Since the beginning of the 1990s, the government has been trying aggressively to expand the emirate’s economy beyond petroleum. Yet the physical growth illustrated in those aerial photos at the Dubai Museum that has so dramatically altered the topography of the city-state is predominately the product of a construction boom within the last 5 years that has seen Dubai become what residents consider to be the fastest-growing city in the world. This property bonanza was triggered by a policy change within the government of Dubai, allowing, in designated areas within the emirate, for the freehold and long-term leasehold of land for non-nationals where previously foreigners were limited only to renting their property. Since the change four years ago, property prices have more than doubled; some people made a lot of money and today others are trying to copy them.

The two principal property developers, Emaar and and Nakheel are controlled by the state, which has engineered the present property boom. Emaar, among other projects, is currently building what will be both the world’s tallest tower and its biggest mall. The company, which is publicly traded, has extremely ambitious aims of becoming one of the most valuable companies in the world within the next decade by diversifying heavily into leisure, hospitality, retail, education, health, and finance, and already has large investments and projects throughout the Arab world. Nakheel, which is part of the Dubai World (the same hotel, real estate and shipping conglomerate whose DP World subsidiary is now well-known in the US for its blocked take-over attempt of P&O American port assets), currently has in excess of $30 billion worth of properties under development within the emirate. These 16 projects, which include the three palm island projects – huge artificial islands in the shape of palm trees filed with hundreds of luxury waterfront homes, hotels and condos — are all sold out with the exception of just two, even though many are still years away from completion. It is, in fact, quite common in Dubai for still-uncompleted properties to be selling at ten, twenty or thirty percent premiums. Properties are being sold right now as fast as developers can dream them up.

So who is buying all these properties? Is Dubai, with a population of a little bit over a million, really growing that fast? Of the residential properties being developed (about two-thirds of the properties under development are residential), only ten percent are being purchased as a primary residence, about twenty percent as a second residence and an amazing seventy percent as purely speculative investments. In other words, the demand is more imagined than real. The situation is largely similar on the commercial side of the market too, where an almost equally large percentage of property is being purchased for purely speculative motives. Property prices have climbed precipitously over the last few years and people want a piece of the excitement. The reality, though, is that there is still a lot of space left in Dubai and therefore no limits to visible supply: there is plenty more desert left to be developed. Even waterfront property is by no means a finite commodity in Dubai as Nakhaal’s current projects, which will add 1,500 km of additional waterfront to the emirate, illustrate. The current property boom therefore has all the hallmarks of a bubble ready to pop: rocketing prices not underpinned by real demand, vastly increasing supply and huge new investments predicated on continued accelerating demand.

A slowdown in the Dubai housing market may already be at hand as there has been a sharp drop in the value of stock markets across the Middle East. After outperforming nearly every other market on the planet for nearly two years, valuations have come back down to earth this past December and January in the United Arab Emirates, Qatar, Saudi Arabia, Kuwait and Jordan. Year-to-date, these markets have fallen between 15 percent in Kuwait and 33 percent in Saudi Arabia to an amazing 55 percent in Dubai (one of the stocks hardest hit was Emaar, which fell by more than half). These spectacular declines on the back of earlier, equally spectacular rallies, appears to be the result of the excess liquidity high oil prices have brought to the region, which touched off a frenzy of buying. As speculation in these markets increased, more and more capital was being leveraged to take bigger and bigger positions. Yet in the past year, successive rises in interest rates, first in the U.S. and more recently around much of the world, have tightened liquidity and forced a sell-off and margin calls in these markets. It would hardly be surprising if this credit crunch causes a parallel slump in real estate prices, which traditionally lag markets in feeling the effects of tightening liquidity.

Despite my belief that there is a very large property bubble currently in Dubai, I am optimistic for the long-term future of the emirate. Dubai is a successful commercial and tourist hub. Many foreign companies choose to run their regional operations out of Dubai because of its favorable tax laws, liberal policies and security. Furthermore, several local corporations are world-class companies. The state-owned DP World is one of the world’s top port operators and very profitable. Similarly, the state-owned airline, Emirates, is also both a world leader and a profitable company. There is even a growing financial center in Dubai that is already the most significant in the region. The emirate also boasts strong and diversified hospitality companies such as Jumeirah. In fact, the state is increasingly betting its future on tourism, which already accounts for a bigger share of GDP than petroleum. In 2005 Dubai welcomed over 6 million tourists; the emirate had 410 hotels at the end of the first quarter of 2006 with a capacity of 35,000 rooms and more new hotels are being added. They boast an incredibly high occupancy rate of around 85 percent, among the highest in the world.

Such economic diversification comes at the right time, because the emirate, which only ever had a small proportion of the United Arab Emirates’ vast oil reserves, is running short of oil (most estimates put the kingdom’s supply of oil as drying up by the end of the decade). But most of all, Dubai represents a positive model for the whole region, of a state that is using its natural wealth to invest in the future and build a life for its people that will allow them to compete in, and be a successful part of the global community. For that Dubai should be commended.