Dubai gears up for next, more modest boom

The next boom is likely to be more gradual, partly because financing will not be as cheap and plentiful

Four kilometres off the coast of Dubai, more than 200 tiny, man-made islands bake under the sun. Built five years ago, they were to be one of the emirate's most spectacular projects, an archipelago of resorts and luxury housing laid out in the shape of a world map.

Apart from a few facilities such as a villa and a beach club, the islands are empty. After creating them at a cost of hundreds of millions of dollars, state-owned property firm Nakheel sold about 70 percent of the land. But most of the buyers have lacked the cash or the will to go ahead with development plans.

A little over three years after a corporate debt crisis drove it to the brink of default, Dubai is still littered with relics of the disaster, in the form of unfinished real estate projects and battered balance sheets.

But it is laying the groundwork for another economic boom, based on its role as a tourism and business hub for the surrounding region, and a haven for money from India, China and fast-growing countries in Africa.

The next boom is likely to be more gradual, partly because financing will not be as cheap and plentiful as it was during the excesses of the last decade. Growth will depend more directly on services that Dubai provides, rather than on the ability of its real estate market to suck up money.

But in some ways, the next boom could rival the last one, boosting Dubai's population about 50 percent by the end of this decade and pushing it deeper into a range of industries, from food processing to diamond trading.

Florence Eid, chief executive of London-based research and advisory firm Arabia Monitor, said some aspects of Dubai, such as its role as a relatively safe financial centre, were set back by the crisis and shown to be weaker than assumed.

"But some have actually been strengthened in the last few years, including its role as an operating base for businessmen from around the region and as a centre for entrepot trade, which it has enjoyed since the pearl fishing and spice trading days of the Arabian Gulf," she said.

"The economy now appears to be embarking on another wave of growth during which it will serve similar functions as Hong Kong and Singapore in Asia, supporting and profiting from growth in industry and trade in a large region surrounding it."

Dubai's expansion plans are striking in that they are being announced while the emirate is still many years away from working through the debt pile it accumulated during last decade's boom and bust.

Standard Chartered estimates US$48bn of bonds and loans will mature between 2014 and 2016, including about US$10bn of restructured debt at state-owned Dubai World and Nakheel. Some of this debt might have to be restructured a second time, the bank said in a research report.

In December, Moody's Investors Service downgraded its credit ratings of three Dubai banks, including the largest, Emirates NBD. It cited concern about problem loans and said it was prepared to cut the ratings further.

But Dubai's ruler, Sheikh Mohammed bin Rashid al-Maktoum, signalled a push for growth in November, announcing plans for a huge tourism and retail development including the world's largest shopping mall, over 100 hotels, and a park 30 percent bigger than London's Hyde Park.

Since then a string of state-owned and private firms have said they are reviving projects mothballed during the crash or launching new ones. Plans even include more man-made islands: last month state-backed Meraas Holding said it would spend US$1.6bn to build an island housing the world's largest ferris wheel, just a few kilometres from Nakheel's archipelago.

Hotel industry consultancy STR Global estimates, based on its contacts with companies in the industry, that Dubai hoteliers plan to add 19,000 new hotel rooms in the next few years - almost a third of the current number of about 63,000.

The government's central projection is for the population to rise above 3m people by 2020 from just over 2m at present. Under an "aggressive" growth scenario, the population could be near 4m by the end of the decade, it estimates.

Since fewer than 20 percent of Dubai's population are local citizens - the vast majority are expatriate workers - such growth would mean an influx of hundreds of thousands of people.

Construction work to accommodate them would require billions of dollars of fresh financing that may be hard to obtain in the wake of the global financial crisis. If growth does accelerate, it could produce the same kind of boom-and-bust cycle that plagued Dubai a few years ago.

"There are certainly legitimate questions to be asked about investment risk in Dubai, given the wild swings in the property market and the boom period's long record of broken promises, which extend to the highest levels," said Jim Krane, author of the book "City of Gold: Dubai and the Dream of Capitalism".

But there are grounds to think Dubai's ambitions are feasible - or at least a large part of them. One of the emirate's advantages is its geographical location, which lets it serve as an air transport hub between Asia, Europe and Africa; Dubai overtook Hong Kong to become the world's third-busiest airport for international passenger traffic last year.

Double-digit annual increases in this traffic, which hit 58 million passengers last year, are helping Dubai attract growing numbers of tourists and investors. About a fifth of passengers leave the airport and come into the city; local industries are lobbying the government to raise this ratio with changes to visa arrangements and other steps.

"The way Dubai has worked in the past few years, they'll create enough demand generators to make sure they have customers for the new hotel rooms," said Naureen Ahmed, manager of analysis at STR Global.

Taxes in Dubai are lower than in many European and Asian cities. This helped boost foreign direct investment flows into the emirate by 17 percent last year - a rapid rate during a period of global economic weakness.

The more difficult financing environment since the global crisis could also benefit Dubai in a way, by preventing the wild investment that characterised the last boom.

With loans harder to obtain, real estate developers are likely to be forced to build their projects in stages, ensuring each stage is viable before moving to the next one.

This may mean some of the projects announced in the last several months are delayed for many years, or never built at all - but the overall effect could be to support Dubai's growth by making the economy more stable.

Loic Pelichet, assistant vice president for research at regional investment firm NBK Capital, said one factor in Dubai's investment decisions would be whether its bid to host the World Expo 2020 is successful. A decision on which country will host the fair is expected this year; local officials have estimated the event could draw 25 million visitors to Dubai.

Iyad Malas, CEO of local shopping mall and hotel operator Majid Al Futtaim, said Dubai's development would depend on two things: tourist numbers and population growth.

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Posted by: savio

The fundamental on any progression is a basic 'Step by step'. You finish a project you sell it and you make another one. The Dubai business model is based on marketing promotion with very well trained advertising company... Don't get me wrong. I believe in the Dubai dream and I live here. But a 5yrs frozen project is mandatory for the government . JBR is a mess, the palm is falling apart, Motor city and sport city is ghost city, business bay seems to have been at war for 10 years with 90% of the building not finished and the roads are under construction non stop. And we hear new projects from Emaar, Nakheel and Damac and they have still court case with hundreds of buyers who have been screwed. A long term project and dream cannot be built on an artificial frame. Please government make some changes and stronger control and ask each of those contractor to finish their project. bring a tourist in a taxi and his first reaction will be 'this city is a construction site'. I love Dubai !!

Posted by: Irene

Everywhere unfinished building sites should first be finished but Dubai lives through their beautiful
Marketing campaigns as this hides the true reality. I live and love Dubai and only want the best for the UAE but I think that all this Marketing-Media "everything is wonderful, business is up just not what is happening in real life! Africa business has slowed down, prices have to be squeezed and cannot take increases, more buyers go to India. Yes increases for people living in Dubai on food, housing etc.people have to struggle to get bye. UAE is no different from Europe right now!!!! In RealEstate the increases because people come in and buy cash. Reality is we are having hard times ahead and by saying to everyone it is getting better will harm many more people than needed! Some sectors are progressing but are not outbalancing the depressed sectors, the unpaid debts/cheques etc.One has to be optimist but avoid being a dreamer and fall in the Media/Marketing game!

Posted by: Razzaque

Govt. shoud put a cap on selling properties not before 3 yrs it's bought to stop rogue property speculators. Govt. must be careful of such things never happens again and strict monitor of real estate is very important to keep teccountry's overall credibility.

Posted by: Tony white

I feel that without control on flipping the bust could happen again. They need to ensure that buyers cannot sell until the development is finished. Still money to be made but requires confidence in Dubais future.

Posted by: Kazim Kirmani

Getting the Expo 2020 to come to Dubai is the real deal based on which these nos. are projected. If it happens (and as someone who has spend 80% of his lifetime here I do really hope it happens!) than we will see a real boom which will be strongly justified.

Posted by: Kaif

A sober balanced assessment of Dubai's prospects, this article is welcome compared to others which are always glorifying every aspect without taking a critical look at ground realities. Perhaps more analysis is needed on Dubai's existing debt and how the authorities hope to service it.

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