When the world is wheezing with economic double pneumonia, is it surprising Dubai has caught a cold?
Rumours of real estate value diminution in Dubai have now been accepted as fact. More ominous rumours about an unsustainable debt overhang, inadequate debt service coverage, likely liquidity solutions through blue-ribbon mergers, continue to circulate.
Recent official pronouncements in this regard, including projected 2009 growth for Dubai at about four to six per cent, are timely.
The year ahead, if anything, is certain to be choppy. The world has to painfully unwind and write off previous consumption (both the addiction and consequentially worthless debt) based on non-existent or unsustainable income.
For businesses, the market capitalisation-based siren call of booking profits today by sucking in tomorrow's likely earnings, and depleting sensibly deployed financial reserves, was never a wise move. Business has painfully learnt that what goes around does come around, and profligate profit-booking is a zero-sum game.
Financial conservatism was never a bad corner to fight from, after all.
The current global financial tsunami has trashed everything in its path. New York Times columnist Thomas Friedman put it aptly when he said: "We finally found the WMD buried in our own backyard – sub-prime mortgages and all the derivatives attached to them."
Recessionary conditions prevail in many G-20 countries and beyond. Credit, as essential business lubrication, remains mostly frozen. UAE banks may have liquidity problems and high loan-to-deposit ratios. Home mortgages remain hard to come by. The possibility of oil breaching $30/barrel on its way down is bad news, exacerbating budget deficits for some nations.
The world will reconsider consumption versus affordability. The US in particular (with roughly 22 per cent of world GDP) must reduce its relative consumption footprint (about 71 per cent of world GDP), and while this will now happen perforce, withdrawal symptoms will be very painful as consumer demand falls.
Dubai realty has battened down hatches. Buyers understandably fear bearish valuations given the tumultuous global situation. A majority of sellers are speculative off-plan investors who have been active flippers for the last six years. This situation will drive short-term flippers out of realty markets, and hopefully deliver a reasonable price bottom in late 2009.
Potential buyers prefer interim rentals because of (a) inability to find adequate credit, (b) uncertainty about continued employment, and, (c) a hope that waiting will yield better prices and a wider selection. Consequently, rents have shot up.
Dubai continues to be intrinsically appealing based on robust demand, and this demand must be fostered. Such demand, weaken as it will in present circumstances, is related to hospitality, travel and leisure, financial services, healthcare, and a wide spectrum of services including media and broadcasting.
We lie at the centre of a demand-driven population within an eight-flying-hour radius. The economic prognosis for
most of this geo-footprint is far better than any other.
Over the longer term, the UAE and especially Dubai is well-placed to successfully leverage what has already been put in play.
Our current situation must be viewed in perspective. Dubai emerged as a likely pre-eminent regional destination in the mid-1980s. However, costs were seen to be high and attracting incremental regional and international business was tough.
When landlords preferred vacancies to lowering rentals, it became harder for businesses to house employees. The solution lay in seriously increasing available housing stock to lower costs.
His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, came up with a raft of visionary solutions to create a world-class city, grow Dubai's civic revenue base – and at the same time make the emirate attractive enough for expatriate residents to buy into the concept of long-term residency.
The premise was that when properly incentivised, a long-term resident would invest a bulk of savings here rather than export capital home. To succeed, this needed a critical mass of expatriate numbers who could be persuaded that it is both worthwhile to invest in brick and mortar.
This approach to investment was already instilled in the expatriate trading community, who had invested in local business for decades. Given freehold ownership, roll-over residency rights mostly linked to the duration of selected residential freehold property ownership, and real property delivery to reasonable quality and schedule, expatriates were gradually won over to investing in Dubai real estate, with an emotional attachment to Dubai.
Healthcare services improved by several notches. Expatriates could even consider retiring in Dubai. The success of Realty Dubai (led by the proven success of Emaar Properties) triggered similar successful real estate strategies in Dubai and elsewhere, regionally and beyond.
Developers, architects, structural engineers, construction companies, quantity surveyors, and project and construction managers along with a host of related businesses opened shop in Dubai and neighbouring emirates.
Consider Singapore: Previously exulted as a role model for Dubai, starting as it did with the Shopping Festival, it is ironic that Dubai subsequently became a wider prescriptive model for Singapore in many economic sectors.
The UAE will undeniably remain at the centre of a regional hub of opportunity for expatriates, and by flocking here
they have also provided many UAE nationals the opportunity to enhance business and employment.
Confidence is intrinsically vaporous, and has understandably settled at an all-time low. International consultants predict that property prices will correct further, and that lack of leverage will depress speculative office development or investment. Many projects will be deferred.
Pricing top down will suffer attrition, although reasonable prices bottom up will hold firm because strong end-user support. A colleague recently reminded me that ultra-tall urban developments are often seen as harbingers of a long-term slide in property values. The need for high-density urbanisation is often conceded by urban planners when the price of inner city land becomes excessively high.
The only way to profitably develop expensive land is to stack the floors as high as possible!
Is that the case in Dubai and the UAE? I would say no, given that we are not short of usable land, and we are simultaneously developing single-family homes and other low-density realty products not too far away.
Burj Dubai was not developed because land was unavailable. As Emaar correctly stated at the time, Burj Dubai is designed to become a signpost for the emerging concept and brand of Dubai and the UAE.
- The author is the former chief executive of Emaar Properties and now runs Konark Resources in Dubai