Property – eRutledge | Arabian Gulf Economics

Bubble, bust, boom

Dubai epitomises the Gulf’s property market. It did suffer a massive correction back in 2009 (Collinson, 2009), the Emirate needed to borrow several billion from Abu Dhabi (Davidson, 2009) but, that debt has been repaid and today the sector is once again booming (Maccioni, 2024).

A dream foreclosed (?)

The following was penned by Davidson in 2009; at the tail-end of the 2003–2008 period in the Emirate of Dubai (UAE) which was described by Bertrand (2012) as “the world’s most massive real estate bubble.”

Glitzy Dubai, long considered the new Monte Carlo or the Las Vegas of the Middle East, has suffered one of the worst crash landings of this global recession. Dubai might be considered a bellwether of the global credit crunch. Until recently touted as a beacon of progress in an otherwise unstable region, the tiny emirate’s seemingly innovative economic and political model is now unravelling, with no end in sight to the uninterrupted stream of bad news. Construction has ground to a shuddering halt, unemployment is rising, sovereign debt is exposed, lawsuits are being prepared, and the population is decreasing, as those who moved to Dubai in search of a better life have either lost their jobs or are cutting their losses and leaving. To make matters worse, as the city empties itself out, traffic thins, and cars and credit cards are abandoned at the airport, the embattled authorities have embroiled themselves in fresh controversies by introducing protectionist policies for their citizens and a new media law that forbids criticism of the economy, and earning Dubai an anti-Semitic branding in the sports world by denying a visa to an Israeli athlete. With investor confidence in tatters and debt repayments looming, its humiliated rulers have had little choice but to turn to their wealthier neighbors. But although help has finally arrived, it is by no means the lifeline that the emirate really needs, and Dubai’s future hangs in the balance.

Only time will tell for history is history (unendingly so). The digitisation of everything is as good as it is bad. One’s predictions and forecasts, with hindsight and internet indexing, can come to be seen as having been too hubristic (one could counter that they were just thinking and writing in a heuristic fashion).

In the same year as Davidson wrote the above, Lewis (2009) said the following. “A six-year boom that turned sand dunes into a glittering metropolis, creating the world’s tallest building, its biggest shopping mall and, some say, a shrine to unbridled capitalism, is grinding to a halt.” And that, “half of all the UAE’s construction projects, totalling £400 billion, have either been put on hold or cancelled, leaving a trail of half-built towers on the outskirts of the city stretching into the desert.”

Red hot (once more)

In a recent piece for the London-based Financial Times, it was said that if you want to “escape the global gloom, just take a flight from its epicentre, London, to any leading capital of the Gulf” Sharma (2022). “Dubai is enjoying yet another real estate boom. Regional rivals like Riyadh are racing to be the next Dubai, funnelling oil profits into property mega-projects.” Sharma also suggests that many of the Gulf leaders do “recognise that a boom built on high oil and property prices is unlikely to endure, but that age-old problem can wait.”

In 2023 The Economist wrote that while Dubai’s property market has much to recommend it (low taxes and a large pool of renters), some wonder if the sector, “the backbone of Dubai’s economy, is again becoming a bubble.” The Emirate has already endured two real estate crashes this century: “an abrupt one during the financial crisis in 2008, when property values fell by half, and a slower one from 2014 to 2020, when they slid by 35 per cent.”

📕 “Money, Markets & (Gulf) Monarchies” →

📕 “On the giga-scale” →

📕 “Running from taxation” →

References

Bloch, R. (2010). Dubai’s Long Goodbye. International journal of urban and regional research, 34(4), 943–951. https://doi.org/10.1111/j.1468-2427.2010.01014.x

Collinson, P. (2009, May 26). Dubai suffers biggest house price slump. The Guardian. https://www.theguardian.com/money/2009/may/26/dubai-property-crash

Crisp, J., & Corfe, O. (2023, December 9). Inside the luxurious lives of the Russians of Dubai. The Daily Telegraph. https://www.telegraph.co.uk/world-news/2023/12/09/inside-the-luxurious-lives-of-the-russians-of-dubai/

Davidson, C. (2009). Dubai: foreclosure of a dream. Middle East report, 251(Summer), 8–13. https://www.jstor.org/stable/27735295

Lewis, P. (2009, February 13). Dubai’s six-year building boom grinds to halt as financial crisis takes hold. The Guardian. https://www.theguardian.com/world/2009/feb/13/dubai-boom-halt

Hanieh, A. (2018). Money, Markets, and Monarchies: The Gulf Cooperation Council and the Political Economy of the Contemporary Middle East. Cambridge University Press.

Maccioni, F. (2024, July 8). Dubai property market stays strong as demand from ultra-rich continues. The Independent. https://www.independent.co.uk/news/world/middle-east/dubai-property-market-luxury-homes-b2575845.html

Renaud, B. (2012). Real Estate Bubble and Financial Crisis in Dubai: Dynamics and Policy Responses. Journal of real estate literature, 20(1), 51–78. https://doi.org/10.1080/10835547.2012.12090313

Sharma, R. (2022, November 21). The Gulf is partying while it can The Financial Times. https://www.ft.com/content/740703ba-96b2-43d1-af9e-848cec61f1ec

The Economist. (2018, September 27). Sweet deserts. The Economist, 428(9111), 58. https://www.economist.com/international/2018/09/27/how-the-united-arab-emirates-became-an-oasis-for-tax-evaders

The Economist. (2022, September 24). Boom time in the Gulf. The Economist, 444(9314), 14. https://www.economist.com/leaders/2022/09/22/an-energy-crisis-and-geopolitics-are-creating-a-new-look-gulf

The Economist. (2022, September 24). Entrepotluck. The Economist, 444(9314), 68–69. https://www.economist.com/finance-and-economics/2022/09/22/dubai-is-the-worlds-resurgent-entrepot

Troianovski, A. (2023, March 15). ‘Russia Outside Russia’: For Elite, Dubai Becomes a Wartime Harbor. New York Times. https://www.nytimes.com/2023/03/13/world/europe/russia-dubai-ukraine-war.html

Dubai dredging

Blog Publications Reports

As I’ve written elsewhere, somewhat prophetically, an adverting campaign by a government-owned construction company, Nakheel Properties, pasted on billboards along Dubai’s Sheikh Zayed arterial road in the early 2000s, read something like: “Dubai puts ‘The World’ on the map; The World puts Dubai on the map.”

‘The World’ (Arabic: جزر العالم; Juzur al-Ālam) is an archipelago of artificial islands constructed in the shape of a world map, just off of the coast of the Emirate of Dubai.

The dredging works were undertaken by two Dutch joint-venture specialist companies, Van Oord and Boskalis. It was these companies who also created the now very much completed Palm Jumeirah (see below). These two companies began dredging works for The World project in 2003 but, works were halted for quite some time due to the 2008 global financial crisis.

As seen from the International Space Station

Dubai to repay Abu Dhabi debt

Blog Publications Reports

First published in:

Economist Intelligence Unit (2013, September 30). Dubai to repay Abu Dhabi debt. Economist Intelligence Unit. https://www.eiu.com/industry/article/851020469/uae-dubai-to-repay-abu-dhabi-debt-in-2014/2013-10-02

Dubai, which needs to repay US$20bn to three Abu Dhabi entities next year, will meet its obligations and is not negotiating to refinance its debt, according to the chairman of the emirate’s Supreme Fiscal Committee, Sheikh Ahmed bin Saeed Al Maktoum. However, if necessary, Abu Dhabi would probably roll over the debt, to avoid any negative impact on market sentiment.

The emirate, which was on the brink of a default in 2009, borrowed US$20bn from its wealthier neighbour to shore up a troubled conglomerate, Dubai World, and others. The debt comprised US$10bn from the Central Bank of the UAE and US$5bn each from two state-owned banks, National Bank of Abu Dhabi and Al Hilal Bank. The US$10bn debt is due to mature in February and the bank debts in November 2014. In comments to reporters, Sheikh Ahmed also said that Dubai’s state-linked companies were doing well and were able to meet their debt repayments.

Debt rises on improved sentiment
Dubai’s debt, including that of government-related entities (GREs), has continued to rise since the global financial crisis. The IMF stated in June that the total debt of the emirate and its GREs rose by US$13bn between March 2012 and April 2013, to US$142bn. This is equivalent to 102% of the estimated 2012 GDP of Dubai and the UAE’s poorer northern emirates. Of the estimated US$93bn owed by GREs, US$60bn will fall due between now and 2017, the Fund added.

The increase in GRE debt in 2012 and early 2013 reflects successful debt restructuring, the strengthening of the UAE economy and its property sector and ample global liquidity. These factors meant that Dubai GREs regained access to international credit markets and sought to take advantage of favourable borrowing conditions.

Fundamentals
Dubai’s performance in 2014 will be pivotal to maintaining solid investor sentiment. Senior government officials have said consistently that the emirate will meet its debt obligations next year, buoyed by the UAE’s wider economic recovery. The UAE is not well served with high-frequency economic indicators, but what indications there are regarding tourism, transport, the property sector, the stockmarket and company results point to considerable strength in the economy persisting in 2013. Ongoing support from high oil prices and the UAE’s appeal as a safe-haven investment location in the region have bolstered the economy.

Rises in airport traffic and hotel occupancy contributed to a strong performance by the tourism industry in Dubai and Abu Dhabi in the first six months of the year. Tourist arrivals in Dubai rose by 11.1% year on year to more than 5.5m in the first half of 2013, helping to drive overall hotel occupancy to 84.6%. The city state’s main airport handled 32.6m passengers during the period, marking an increase of 16.9% year on year. Furthermore, the property market in Dubai sparked back into life in 2012 and has continued to gain momentum in 2013. This has certainly benefited the finances of many GREs.

The main risks to this ongoing rebound include a shift down in oil prices and slowing global growth. We forecast that international oil prices will dip next year but will remain above US$100/barrel. On balance, we expect global GDP this year to expand by 2% at market exchange rates, down from global growth of 2.2% in 2012. However, we expect most of the currently suffering emerging markets to perform better in 2014, if only because the US, the EU and Japan are poised for faster growth. This should lead to a mild rebound in global GDP next year, to 2.7%.

More reforms needed
Dubai has been successful in restructuring GRE debt since the financial crisis, with most major agreements in place; a final deal regarding the debt of Dubai Holding is advanced but still pending. Progress with restructuring certainly boosted investor sentiment in 2012. Alongside this, the UAE is working on reforms to limit the risk of a renewed debt crisis.

The Central Bank has moved to curtail local banks’ exposure to GREs, proposing that lenders should offer no more than 100% of their capital base to local governments and to state-linked entities. This law was announced in April 2012, and banks were told to be in compliance by the end of September last year. However, several banks—including leading UAE banks such as National Bank of Abu Dhabi, Emirates NBD, Abu Dhabi Commercial Bank and Noor Islamic Bank—said that they were unable to comply. The Central Bank has not yet managed to finalise this rule, but it announced in mid-September that an agreement had been reached with commercial banks and would be confirmed before the end of 2013.

The IMF has also stressed the importance of greater transparency with regard to the finances of GREs. The Fund acknowledged that the government had taken some steps towards better oversight. For example, the Dubai government has put in place a team to oversee debt issuance, and any new borrowing by GREs needs to be approved by the Supreme Fiscal Committee. Abu Dhabi, meanwhile, has improved its monitoring of GRE debt. Nevertheless, the IMF has urged a more comprehensive approach to transparency and the governance of GREs, stressing the importance of better data availability on debt and further reforms to improve corporate governance of GREs.

Roll over?
The finances of Dubai and the emirate’s GREs have benefited from the economic rebound in 2012‑13. As a result, Dubai may now be in a position to repay its debts to neighbouring Abu Dhabi on schedule in 2014. However, any difficulties in meeting the due debt would play out behind closed doors, and Abu Dhabi would probably roll over the debt if necessary, to avoid any negative impact on market sentiment.