Dubai is reviving massive real estate projects as its economy recovers from a corporate debt crisis, but this time around, constraints on financing are likely to slow the pace of its building boom.
Memories of the crisis will keep many investors cautious about stumping up money before projects are completed. That will leave the plans heavily dependent on bank loans and the bond markets - and the global climate is not favourable for banks.
Official announcements over the past few days have recalled the heady days of the mid-2000s, when Dubai was building some of ts most flamboyant projects, including the world's tallest skyscraper and an archipelago of man-made islands.
Dubai's ruler Sheikh Mohammed bin Rashid al-Maktoum unveiled plans last week for Emaar Properties and conglomerate Dubai Holding to build a complex housing 100 hotels and the world's biggest shopping mall.
He did not say how much the project would cost but one local property analyst, speaking on condition of anonymity in the absence of fuller details, estimated it would cost between $20 billion and $50 billion. The upper end of that range would be well over half of Dubai's annual economic output.
On Monday, Sheikh Mohammed announced that Dubai planned to build a AED10bn ($2.7 billion) complex of five theme parks. Other projects dusted off by the government and property developers in the last few months include a canal to the city's business district and a $1 billion replica of the Taj Mahal.
It is by no means certain that all these plans will go ahead. Dubai has a history of cancelled projects: plans for a kilometre-high tower, an underwater hotel and a huge waterfront development were mooted in the boom years and never happened.
But unlike projects which ran into trouble during the crisis of 2009-2010, the viability of the new plans will be based to a large degree not on Dubai's volatile real estate market, but on revenues from tourism and retail spending.
So if the emirate's tourist boom continues, the projects may pay off. Passenger traffic at Dubai International Airport is growing at an annual rate of well over 10 percent.
Nevertheless, in the aftermath of Dubai's crisis, it would be difficult to finance much of the projects by pre-selling parts of them, said Craig Plumb, regional head of research at consultancy Jones Lang LaSalle.
"There is natural caution among investors to buy off-plan. There is investor appetite for some small off-plan projects but certainly not at this scale," he said.
"So where the money is going to come from for this project is a question that Emaar and Dubai Holding will have to address soon."
In contrast to its oil-rich neighbour Abu Dhabi, Dubai's government does not have the large fiscal reserves needed to finance the projects; it was forced to take a last-minute $10 billion bailout from Abu Dhabi at the height of the crisis to avoid a bond default of a state-linked developer.
The International Monetary Fund estimates Dubai's government-linked entities will need to repay about $9.4 billion of maturing bonds and syndicated loans in 2013 and $31.0 billion - much of it loans that were extended during the crisis - in 2014. It calls refinancing these amounts "a challenge".
So Dubai will need to finance its projects from the markets, and the loan markets do not look as attractive as they did in the mid-2000s, when banks were scrambling to lend to the emirate.
European banks have been cutting back their foreign lending because of financial pressures in their home countries, while many have been burned by Dubai debt restructurings since 2009.
"People have not fully forgotten what happened during the crisis," said one senior Dubai-based banker.
Another international banker said he had not heard of any serious financing plan for the shopping mall project so far.
"Given the magnitude of the project the government is talking about, we would be in the loop if there was a serious financing plan. This looks very initial and preliminary to me right now," he said.
With foreign banks cautious, Dubai will need to turn to its local banks. But they may not be big enough, especially since rules introduced by the central bank this year in response to the crisis limit commercial banks' exposure to state-linked entities. Some banks already exceed the limit.
"Local banks are liquid but I can't see them pulling something like this alone," said the first Dubai banker. "Even to finance 50 percent of the project, as it's planned now, will be a challenge for them."
That leaves the bond market. Here the climate has improved dramatically this year as investors have regained confidence in Dubai; yields on bonds from the emirate have plunged.
In particular, sukuk (Islamic bonds) from Dubai have attracted massive demand, partly because of a huge supply/demand imbalance among cash-rich Islamic funds. So sukuk could play a big role in Dubai's financing activities.
However, bond market traders and investors said the Dubai government might not be able to raise more than roughly $3 billion through bond issues in a single year.
State-linked companies would probably find it more difficult to issue bonds and have to pay investors higher yields, especially since the Dubai government has been reluctant to provide explicit guarantees for their bonds.
The result, analysts said, is that Dubai will probably implement its big projects in phases spread over many years, with the financing of each phase contingent on economic and market conditions at the time.
Although Sheikh Mohammed said last week that construction of the shopping mall complex should start "immediately", he did not give a time frame.
State-backed companies from Abu Dhabi could be invited to join in parts of the projects to improve access to financing.
"Abu Dhabi or some of its companies may be part of this mega development," said an Abu Dhabi government official who did not wish to be identified.
"It is early days, let's wait for the devil in the details."
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