What Real Estate Crash? Dubai's Towering Ambitions ReturnPublished December 11, 2012 in Arabic Knowledge@Wharton
Where to build the world's biggest mall? How about digging a canal running from the sea under an already built highway? Would it be possible to construct a giant theme park with five different theme parks inside it? Where else but in Dubai, of course.
In years past, the Emirate made a name for itself by planning projects that seemed to be concocted from sheer flights of fancy -- towers that would revolve, an underwater hotel, a suburb replete with mechanized dinosaurs. Some actually came to fruition, such as the Burj Khalifa, the world's tallest freestanding tower, and the man-made Palm Jumeirah island. But most vanished like desert mirages in 2009, when Dubai's debt standstill announcement caused economic shockwaves worldwide.
Owing much to its newfound status as a regional safe haven from Arab Spring discontent, Dubai's economy has inched back. And seeking to capitalize on this momentum, the Emirate's leadership has in recent weeks announced a series of development megaprojects that brought back memories of the days during its boom when outlandish schemes were announced almost daily.
Those within its real estate and financial sectors, though, suggest that there is merit to the new developments being announced by Dubai. Economic indicators such as tourism and real estate -- which make up the majority of oil-less Dubai's GDP -- have seen growth in the past year, and investment newly flows in from elsewhere in the Middle East and Asia. Additionally, they suggest, caution rules the mindset of everyone involved in real estate that survived the crash, and will temper development and the market.
"After six years of boom craziness that crashed in 2008, Dubai is saying it got a chance to catch its breath during the Great Recession, and now the City of Gold is back in action," says Jim Krane, Gulf expert at Cambridge University's Judge Business School, and author of the book, "Dubai: The Story of the World's Fastest City."
"With the price of oil stubbornly high there is cash sloshing around the neighboring export states," Krane adds. "Oil-less Dubai is trying to work its old magic, devising investment vehicles that can soak up some of that oil revenue. [The] timing isn't bad, with global stock and bond markets discredited, gold overvalued, and investors grasping for any scheme that alleges a return -- hence the flood of cash being plowed into Iowa farmland. In that kind of market, Dubai figures, why not pitch some real estate?"
Real Estate Revival
A criticism leveled at a number of real estate projects announced during Dubai's boom was that they were geared towards generating headlines for the Emirate rather than being actual plans for development. Earlier this year, two private developments seemed to stir up memories of the boom.
One was a serviced luxury apartment building that is being built by local developer Emaar outside its flagship retail development, The Dubai Mall. Two days before it became publicly available in September, there were lines outside the developer's office with people waiting for a chance to buy an apartment. Some real estate consultancies immediately sounded off on concerns of speculative buying, which caused much of the crash in the market during the 2009 downturn.
The following month, a private developer's plan to build a replica of the Taj Mahal in an outlying Dubai suburb -- one that would be four times the size of the original, and include a hotel and shops -- generated headlines around the world, and outrage in India. Though news to many outside the region, the Taj Mahal replica was actually a revival of an old project from Dubai's pre-2008 boom days, called Falconcity of Wonders. In that original scheme, the replica of Agra's monument was just part of a collection of recreated famous sites, including the Eiffel Tower and the Pyramids.
The media attention these private projects received seemed to have spurred Dubai's leadership to bring back its own projects that had been shelved. In quick succession, Dubai announced a series of developments -- the biggest being Mohammed Bin Rashid City, a mixed commercial and residential master plan that would include the world's biggest mall and a city park that would be 30% larger than London's Hyde Park. Additionally, Sheikh Mohammed Bin Rashid, Dubai's ruler, announced a plan for a 46-mile long canal that would run from the sea through the city, and under its existing main highway, as well as a US$2 billion theme park plan, an expansion of one of its beach attractions, and a pedestrian bridge over Dubai Creek. "We do not anticipate the future. We build it," the ruler told media during the announcement of the city to be built in his name.
Reaction was mixed. While most of the local press in the United Arab Emirates [UAE] enthusiastically covered each announcement, international media reports were skeptical, reflecting the concerns of investors who were caught in the wake of Dubai's last bust. Additionally, Reuters reported that two of the executives that Dubai tapped for its megaprojects during its boom have been brought back to manage its renewed offerings.
Krane, though, observes that this time around, though big in scale, Dubai's projects are not like what it planned before. "What's on offer now looks like a warmed-over revival of modest pre-crash projects," Krane says, taking particular note of the plan for Mohammed Bin Rashid City.
"Big-name links like Universal Studios are being resurrected -- no sense wasting all that negotiating effort. Tiger Woods is probably delighted that someone still wants a golf course with his name on it. And the part of town that is targeted, the Al Quoz industrial zone, is filled with low-value warehousing and manufacturing, which was never going to be there for the long term. In essence, the city is asking investors to redevelop a rundown district."
"Again, these are fairly sober projects. Look a bit closer: Hyde Park isn't all that big and Dubai desperately needs some central public space. The housing is low-rise -- and it's being built on land, for a change, rather than at sea. Yes the mall is big, but big malls have been succeeding in Dubai. None of this exudes the air of wild speculation we saw in 2008.
"Also -- the city's population is still growing fast. These projects -- if they are funded and finished -- won't be ready for years. By then, the leadership hopes, the overhang of empty apartments and offices will be a memory and new supply will be needed."
Positive, but Cautious
Though Dubai's real estate sector has only grown 1.6% in the first half of this year, its tourism sector is growing at 13% a year. Hotels reported occupancy rates of 82% last year, and the Emirate's overall economic growth in the first half of 2012 was 4.1% on an annual basis.
The mega projects are aimed at further boosting tourism, and within the country's real estate industry, they are welcome news, as they coincide with a general sense that the market has been improving, albeit limited to certain built-up neighborhoods in Dubai and Abu Dhabi, commercial projects, and hotel buildings.
"We are definitely seeing a return in confidence to the Dubai real estate market. Dubai is as ambitious as ever," says Natasha Gangaramani, executive director of the Al Fara'a Group, a Dubai-based real estate and construction conglomerate. "I anticipate we will see a mature planned approach which is only going to benefit the long term health and credibility of the real estate sector amongst domestic and international investors. The key to the success of individual projects and the future performance of the overall market will be the adoption of a realistic phasing strategy in line with market demand."
Gangaramani, whose family has been involved in the development of Dubai's landscape for over 30 years, notes that the Mohammed Bin Rashid City project addresses the city's future needs, since "Dubai's active population is expected to grow by 6.1% on average over the next eight years, faster than residential supply, which is set to grow by 4.9 per cent over the next two years -- this is critical in terms of delivery of units."
"There's been an increase in inquries," notes Raj Achan, business development manager for Hilson Moran, a U.K. construction consultancy that has offices in the UAE. His firm recently picked up a large contract to oversee construction of a major bank's new headquarters in Abu Dhabi.
Achan notes that in addition to Dubai's real estate sector being boosted by regional expats fleeing Arab Spring unrest in their native countries, there is an increased flow of investment into the market from Russia and Asia. According to local studies, Indians make up the largest segment of first-time property buyers in the city.
"If you go back 15 years, the Dubai Mall and Burj Khalifa were announced, and everyone asked if they were going to happen or not, and they happened," Achan says. "The market will pick up, because Dubai is a key city."
Built into any project now is a sense of caution and better planning, says Steven Nilles, architect in charge of Goettsch Partners Abu Dhabi office. His firm is focused on developing some of Abu Dhabi's key future sites, such as the Sowwah Square office development. After Dubai's crash, Nilles says, Abu Dhabi's leadership took a hard look at what was being built, and what has yet to be developed.
"We do see a reorganization and a reassessment of strategic development projects, which makes perfect economic sense," Nilles says. "There is also more focus on the economic viability of a project once it is completed."
Review and caution are sentiments shared by those in all aspects of the real estate industry in the country, Nilles says, and is expected of investors. He sees an emphasis being placed on project management, quality and outcomes. "The best of the best are still here," he says. "Everyone has been through [the crash] and everyone knows what they are getting into with their eyes wide open."
Gangaramani notes that Dubai has taken additional measures since 2008 to prevent the speculative development that left the city with a number of unfinished projects, and numerous lawsuits. "The market has a way of correcting itself and there have been many lessons learnt both on individual, organizational and industry levels," she says. "We have witnessed the strengthening and maturing of the real estate sector and I am confident it will only progress strategically moving forward. With the establishment of RERA [Real Estate Regulatory Authority] by the Dubai Land Department, there are far more real estate regulations in place. RERA has played a tremendous role in restoring market confidence by reframing policies and guidelines, enforcing balanced norms and by bringing in transparency in the workings.
"Markets today are globally connected and the real estate downturn we witnessed was a result of the global economy. Investors across the globe have become increasingly discerning and will need to evaluate the global outlook and their portfolio and analyze the local real estate dynamics in order to make strategic real estate investment decisions in the UAE or else where."
Nilles echoes Gangaramani's opinion of investor attitudes. "Certainly with outside investors, before putting money into a project, they will be examining a number of criteria," he says. "I don't think you're going to see any wholesale massive development like before. I can't imagine anyone investing in anything massive that is purely speculative in nature, like in the past."
Which is why for Dubai's mega projects, as with any other plan that may be revealed, the big question will be about financing. Dubai still has maturing debt -- US$9.8 billion expected to be due in 2013, and another US$3 billion in 2014.
Krane notes that aside from the announcements, details about actual deadlines or financing structures for Dubai's mega projects are not available. "And the Dubai leadership's credibility is nowhere near as strong as it was before its infamous debt standstill announcement of 2009," he adds.
"It's a test of the waters. Dubai wants to know: Did we blow it? Or can we have another shot? Whether or not these projects are built depends on how investors answer those questions."