Dubai builds, but they don’t come

September 16, 2009

DUBAI/There is something surreal about the financial crisis that has engulfed Dubai.

A small desert emirate, without significant hydrocarbon reserves, Dubai finds itself geared to the eyebrows in the midst of a global downturn. Deutsche Bank estimates its external debts at about $74.3 billion. That, for the record, is 107 percent of the emirate’s expected 2009 GDP, or more than 14 times its government revenues for 2006 (the latest year for which data is available).

But it isn’t just the extreme leverage that is surreal. Dubai has long borrowed heavily to invest. The real twist comes from the wacky way that Dubai has chosen to invest its borrowed cash.

True, not all of Dubai’s money-making schemes were foolish. The development of DP World, a ports services business, made eminent sense, given the emirate’s status as a trade hub. And this has proved reasonably successful.

But some of its “get rich quick” ideas were about as sound as something out of Gulliver’s Travels — the attempts of the state of Lagado to extract sunbeams from cucumbers, for instance. Into this category one might put the attempt to conjure a financial centre out of the desert, or to build luxury housing on sandbanks in the Arabian Gulf. Or, indeed, the attempt to create a sovereign wealth fund, Istithmar, without having any surpluses to inject into it in the first place.

Outsiders have long marvelled at this “build it and they will come” approach. Now its shortcomings are becoming clear. Much of Dubai is half-built and they probably won’t come.

Istithmar, for instance, used leverage to pursue an investment strategy built around luxury goods, retail and financial services. It is not hard to see why this has hit the rocks. Istithmar’s parent, Dubai World, is in the process of restructuring some $12 billion of the debt it has taken on.

Predictably, it has been forced into the expedient of trying to sell good assets to fund losses on the toxic ones. However its attempts to hawk part of its $6.6 billion stake in listed DP World to a local private equity firm have thus far proved fruitless as the two sides failed to agree on price.

How the crisis pans out depends on Dubai’s willingness to stand behind the various state-controlled enterprises it has spawned. Thus far it has been willing to do so. But the calls on the emirate’s meagre finances (its government revenues were little more $5 billion in 2006) seem relentless. In December it must repay or refinance a $3.5 billion bond taken out by Nakheel, Dubai World’s property unit. And the losses from other failed ventures, such as Istithmar’s investment in high end U.S. retailer Barneys, are also mounting up. Deutsche Bank reckons it will have to refinance an average of $12.5 billion in external debt between 2010 and 2013.

To continue to backstop ventures that have lost significant value or may take longer than expected to generate free cashflow, Dubai may be forced to turn for assistance to its cash rich neighbour Abu Dhabi, which has already lent it $10 billion and has provisionally undertaken to provide a further $10 billion of assistance.

Were this to be sought it might stabilise Dubai’s finances, but at a cost. Dubai’s ambition to be a financial hub, tourist destination and haven for the world’s super rich depended to some extent on its relatively liberal social attitudes. The more dependent the emirate becomes on its conservative neighbour for money, the harder it may be to retain that liberal tinge.


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Building all those fancy architecture is easy. All you need is to have, or claim to have the money. Hire the world’s best architects and builders. Hire the world’s lowest cost construction workers from India.

But turn that into a business is something Dubai yet to learn. They were told ‘build big and they will come’. They look at Las Vegas and believed it. After all, both are deserts right? Yes desert with an airport. But the inability to see beyond the obvious is Dubai problem. And perhaps undoing. Wealthy foreigners don’t come just because it’s big and fancy. These people are already big and fancy.

Posted by The Real Deal | Report as abusive

I don’t think AD wants to take over and humiliate Dubai. It might be more conservative – a bit – but it knows that Dubai has been the best marketing exercise the UAE could ever have. It has made this hot, sandy, ecologically unsound part of the world a viable, indeed thriving, urban environment. As Jim Krane says, imagine if the American Indians or Australian Aborigines had built New York or Sidney in the 15th century?
Oh and DP World was not hawking, Abraaj was fishing.

Posted by frank kane | Report as abusive

I think the basic model of Dubai was OK. They just went way too far. A few thousand villas in a few years would work fantastic but hundreds of thousands can be a major problem.

For years, there was too much marketing disinformation, oversized egos, easy money, and easy profits. Greed led to bad investments. It seemed the only limit was the size of people’s imaginations.

The funny thing though is this is was mostly western money that was wasted. The Dubai sheiks aren’t losing out in this bubble. Hot shot property investors from the UK, Russia, and banks like Citibank funded everything.

It is the foreign investors, not the local Dubai residents, who most need AD to bail out Dubai.

Posted by Stephen Weingartner | Report as abusive

Would You please give us a clue on where the phrase “Arabian Gulf” is rooted in. Well over a couple of thousands ago and even before this Gulf was named Persian and all over the world and even in the historical documents it’s recognized and regarded as “Persian Gulf”.

Posted by Kamran Darki | Report as abusive

hummm…sounds like a rerun… ‘Enron’ all over again.

Posted by beth s | Report as abusive

the UAE have been purchasing weapons in billions of dollars
i don’t think they will go cheap on one of their most important cities , Dubai is only a state in the UAE , imagine NY needs money badly do you think washington will let it down ?

Dubai is an ‘Emirate’ which is different from a state as is commonly known. Dubai has its own ruler or Emirs(Monarchs), but the Emirate is part of the large entity, the UAE. Abu Dhabi has already lent Dubai 10 US billion earlier this year. But they may hesistate to give 10s of billions more if its a sink hole.
And if I may, the term ‘American Indian’ is passe, I believe the accepted term now, is Native American. Everybody knows who Indians are. :)

Posted by Faisal I. | Report as abusive

Dubai simply can’t sustain the exponential growth it has brought to the city. Thousands of apartments are empty and thousands of expats have fled the country leaving debts behinds. The initial model, to attract foreign direct investments, has proved pivotal in shaping what Dubai has become. But depending heavily on real estate without factoring in the complexeties of exogenus forces such as the credit crunch, has left this city in dust. Especially since Dubai can’t rely on petro-dollars. On the contrary, Bahrain has been the role model of the GCC. Diversifying away from oil and promoting banking in the mid 70′s. The government, given its small size, has not leveraged and has sustained the linear growth that Bahrain has experienced over the years. Dubai’s inflation was hoovering around 12% last year as to Bahrain’s 3% inflation. Greed has terrible consequences and I can assure you that Dubai is feeling the pinch of building these so called inconic designs such as the Palm, the World, Burj Dubai, etc. If you drive through the city at night, you will realize that thousands of apartments are vacant. But life is a school and hopefully Dubai have learnt the lesson the hard way.

Posted by Ameen | Report as abusive

Dubai is for real…and should be compared more to Singapore than to Las Vegas for the following arguments:
a) where else in the entire Middle East and North Africa (and you can include India, Pakistan, and Iran) would you have 3 airlines (Emirates, Etihad, Air Arabia) within one hour drive serving approx 300 destinations (including provincial airports) on a daily basis with more than 14 daily flights to the UK alone for example. This is not a matter of a desert with an airport….this is a fantastic infrastructure that is second to none in the Greater Middle East region. Dubai Airport alone received more than 38 million pax last year, most of them transit pax. For a city of 1.5 million residents, that’s a remarkable accomplishment by any standard.
b) For residents of Dubai the quality of road infrastructure beats that in any US state or European country
c) shopping heaven: Dubai with its fabulous mall environment and more than 48% Retailer Presence (ranked 4th globally after only London, Paris, and NY) should be able to replace Europe and the US as the shopping destination for residents of the Greater Middle East region. Arabs from the Middle East will have a great time shopping in a city sensitive to their culture, where they can read labels in Arabic and English, enjoy Arab hospitality in a clean and cheerful environment. Further they don’t have to endure the recent humiliation at US and European entry and exit points.

Having said the above, Dubai has some challenges ahead some of which are:
a) Dubai merchants will need to step up to the plate and provide their customers with prices and after sale services comparable to those in the US, Europe, Hong Kong, and Singapore. If they are not capable of doing that on their own (being greedy or complacent) the Govt should introduce regulations to increase competition and eliminate the monopolies (of currently concentrated dealerships.) I don’t see Dubai surviving as a shopping tourism destination charging customers 30-40% premium on prices in the US of equivalent products and lesser quality after sales service. If shopping in the US, Singapore, or Hong Kong will deliver better pricing and quality services to tourist shoppers, all those great malls built in Dubai will turn out to be white UAE merchants: it’s over to you now…
b) the UAE will have to fine tune some of their practices towards the large expatriate community and develop an integration plan for the desirable elements of this community. If the plan is to keep all non UAE citizens in an expatriate status indefinitely, the real estate market will be highly cyclical to reflect the economic cycles and the nature of the residency laws in the UAE. Without a clear feeling of belonging, the expatriate community will likely invest their surplus income back home (wherever that is) rather than in Dubai and the UAE.

God bless the UAE…God bless Dubai.

Think of all those naive investment banks, law firms, consultants etc that flocked to Dubai thinking they were spinning gold from sand.

Posted by Ali G | Report as abusive

For Dubai it has been a learning process. Like any new venture you win some you loose some. If Dubai were to implement reforms as fast as it can announce new projects the problem would be greatly minimized.
Being an expatriate means it is not your country , why would anyone keep the extra cash or do more investment in an country which is not you own and which can be taken away any time( uncertainty) as a result the profits flow out instead of getting reinvested in the economy.
Any one want to do local sales they do not remain the owner of the company as they cannot have more than 49% holding in the company. As a result Businessman become cautious to invest wholeheartedly, result less inflow of capital.
High cost of maintaining the business forces retailers to hike prices which defeats the main purpose of duty free , tax free shopping hence the aim of making the country shopping friendly gets defeated to a large extent.

Posted by Nirup | Report as abusive

Dubai excludes foreign residents with Hepatitis. According to WHO this amounts to over 600 million people worldwide. So I think it is a case of “build it and only some are allowed to come”.

Posted by C Wong | Report as abusive

M Kamal:

I know a good friend who went to Dubai 20 years ago to start a business and intended to stay 2 years. He stayed 20 and experienced the transformation first hand.

Here’s the funny part: he still feels an expat, little emotion about the place, and did not buy any real estate despite all the buildup. He is packing up to leave Dubai now.

Because Dubai is strictly for the tiny minority of native citizens. That means 95% of the people are there to make a temporary living, to make some quick money, or to enjoy a vacation.

So what is the business model for all those fancy buildup? Excluding the hotels, the malls and the airports. Dubai government is struggling because there is no business plan nor residence plan.

Posted by The Real Deal | Report as abusive

The article ‘Dubai Foreclosure of a dream’ by Christopher Davidson expands on a lot of the points in this article. Worth a read as it put things into their context.

Posted by Spatula | Report as abusive

To think that Abu Dhabi is conservative is incredibly naive. Its development plans – regardless of what the PR claims – are very liberal; from several museums to a formula one race track. Yes there will much champagne flowing in Abu Dhabi too. Everyone needs Dubai, cause if Dubai goes bankrupt no one will touch the Gulf with a yardstick!

Posted by Mishaal | Report as abusive

Dubai is the victim of the proverbial ‘tall poppy syndrome’; whereby its prominence was exalted in the media and is now being (often) vitriolically criticised. Some of that criticism is well founded. The Gov is over leveraged, the risks they took in some cases, were absurd. However, in many ways, Dubai’s unfolding mirrors the state of play of many indebted governments. They just got into debt more dramatically and outlandishly than others! Ultimately what we see in Dubai and in the world today is a total collapse of corporate governance and broader social ethics.