Measuring as long as a double-decker bus and twice as wide, a model landscape envisioning Abu Dhabi’s future was on display at a recent real estate conference there. Surrounded by large screens and a second level for those seeking a birds-eye view, the plastic mega-miniature city, dubbed Abu Dhabi 2030, was a sprawling dream of modern urban design, complete with futuristic towers and bridges, geometric housing clusters and expansive greenways. Seemingly self-aware of what was on display, the landscape lit up specific structures on cue as a British-accented narrative and throbbing music enveloped the scene. Under dimmed lights, the soon to open Ferrari World theme park, shaped like a giant starfish, glowed an opaque blue. Conference attendees expressed their admiration.

But a short walk away, inside a sparsely populated conference room, the proposed skyline for Abu Dhabi, capital of the United Arab Emirates (UAE), was being debated by another set of attendees, many of them veteran real estate professionals. And there was little support for the scale or scope of the master plan. Instead, there was agreement such a skyline could not be completed in 20 years, and that the human and capital cost needed to achieve such a transformation would be enormous, even for the oil-rich Emirate.

Kamil Homsi, president of New York-based investment firm Global Realty Capital, repeatedly demanded that his colleagues answer his questions about the plan: What was its purpose and where would all the people needed to populate such a city come from? "Is it all about towers?" Homsi asked. "Surely the current economic climate would give us a reality check — but it seems no lessons have been learned in the last two years." Mustering one of the few defenses for the UAE’s ambitious plan for its capital was Mohammed El-Hage, director of investment banking for Abu Dhabi-based Unifund Capital. "This vision is meant to inspire people," El-Hage said. "If we can land even halfway there, it will be one hell of a development."

The doubts expressed were a far cry from just two years ago, when price increases in the UAE’s real estate market were on a six-year run, and real estate conferences like these sometimes had investors selling off-plan paper properties for tidy profits only minutes after purchase. But the unease is symptomatic of the current state of the UAE’s real estate market, which has seen billions of dollars worth of projects put on hold or cancelled since the global economic downturn began, and real estate prices in Dubai dropping by as much as 50%. The city state is attempting to correct the issues that contributed to the real estate bubble, enacting laws that would reduce property speculation and, just recently, provide landlords the right to choose their own property management firms.

But consumer confidence remains low, as horror stories about the harsh consequences of falling behind on mortgage payments in the UAE have become legend. Stuck between ambivalent lenders and wary customers, those involved in real estate there say they are glad to still be operational, and are reassessing their strategies, trying to figure out how best to move forward. While few admit to partaking in the former frenzy of Dubai’s property market, all agree that the woes ailing the market can be blamed on greed.

"There is no easy solution for the market downturn when you are dealing with a framework where everyone believed there was no tomorrow," says Monica Mittal, director of projects for Dubai-based Investments House, which still has a portfolio of 10 housing projects in the country. The sudden build-up of the city was tremendous, too fast for government regulation to keep up, allowing questionable development firms into the market, she notes. "[There were] people with no development backgrounds at all, who anywhere else in the world would’ve been kicked out. But that self-regulation didn’t happen in Dubai, as it didn’t happen in the rest of the world."

The Tiling on the Floor

One senior real estate executive in the Arabian Gulf, who asked for anonymity, says even established developers did not know enough or take the time to learn about what they were building. "The result was that the vast majority of product here is not as good as it could have been. Margins were simply too great and it was too easy to sell off-plan for people to care what the end product looked like, or how it was to be utilized and managed."

Since the downturn, Mittal says her firm has sat down with clients, and tried to give them what they wanted, including allowing some property buyers to move into projects that have been completed. "We’ll take a bit of a hit," she says, but maintains it is part of her firm’s focus to serve the long-term buyer, which she says requires a more detailed approach. "They are not judging on size or pricing, but what’s the tiling on the floor," she says. "You have to be more customer-focused." Another opportunity Mittal’s firm has found is providing consulting to developers who are trying to finish their projects. All are strategies to cope that everyone in real estate has been forced to find, says Mittal, a long-term resident of Dubai who admits being financially affected by the collapse of the city’s real estate market. "The government had a very good vision; it really became a role model for the Gulf," she says. "I can’t blame anybody. Nobody in Dubai had faced a downturn. Prices peaked during the global recession."

Despite the downward trends in the U.S. housing market, Dubai’s turn to fall from its property price heights was not apparent to many in the market, according to Charlie Acworth, CEO of Al Wa’ab City, a US$3.2 billion mixed use development in Qatar, and previously a director of Abu Dhabi-based developer Aldar. The reason? It was too easy to buy into the hype rather than make tough decisions, he says. "There had been people prophesying the bursting of the real estate bubble for three to four years, but I likened it to a hot air balloon — it was having lots of knives stuck in it but the skin got thicker and the government and master developers kept pumping more hot air into it."

Innovative approaches to dealing with the downturn have been rare, Acworth notes. "A minor example is Sorouh, a listed Abu Dhabi developer which has done a good job of renegotiating with some of its buyers to concentrate them into smaller, more developable blocks, and they have also worked well with mortgage providers to provide innovative and [locally] cheap finance packages," Acworth says. "Another example is the joint venture between U.S. developer Related and Gulf Capital, which have cherry picked some retail development within master developed schemes and now have a nice specialized base to work from."

Developers should also have looked at alternative strategies rather than relying on off-plan sales, Acworth says. "A key element missing in the Middle East is institutional investment in real estate. There are many reasons, but had developers built the right product and pitched it as investment funds or institutions, they could have avoided many of their funding problems."

Launching in the Middle of the Bust

As in the U.S., the lack of capital available to corporations and consumers helped fuel Dubai’s real estate market collapse. Sundar Parthasarathy, senior vice president and head of consumer assets and consumer banking at Abu Dhabi Commercial Bank, says a positive outcome of the downturn is a chance for banks to encourage responsible consumerism. "Between 2005 and 2008, credit growth rates in the UAE, and even Qatar and Bahrain, exceeded the nominal GDP growth rates by an average 15% per annum," Parthasarathy says. "In hindsight, these rates of growth were unsustainable over the long term. Despite having access to large pools of low-cost deposits, local deposit bases were insufficient to fund the loan growth, and banks — particularly those in the UAE — had to increase their reliance on wholesale funding."

Despite the economic difficulties, ADCB managed to grow its business — deposits increased 11% last year, and the bank’s operating income rose 9% — by following a strategy to maximize expected future value, even at the expense of lower near term earnings, says Parthasarathy. The bank did not lay off employees, and invested in a new customer relations management system, introduced a credit scoring system, secured an offshore banking license and spent millions on a marketing campaign. The banker is particularly proud of ADCB introducing a system of relationship-based pricing. "Organizations fail to realize the heightened levels of insecurity experienced by customers [in a recession]," he says. "While a recession may feel like the worst time to spend marketing dollars, it surely is the best time to build brands. The connections made with customers and stakeholders during these times are often stronger than those made in times of prosperity."

Timing helped those who were early to the Dubai real estate boom, but one global firm found itself launching its Middle East operations in Dubai in the midst of the market bust. "We were sitting there, thinking, this is an interesting time to set up a real estate agency," notes Michael Atwell, head of Middle East operations for Cushman & Wakefield. With a global brand to protect, Atwell says his firm sought ways to save, but didn’t skimp on hires for the new office. "You’ve got to have good people," Atwell states. Complicating efforts further was that one of the firm’s main services is property valuation, a sensitive issue for lenders and borrowers. Atwell says a lack of transparency in the Dubai market prevents valuations done on due diligence and market research, but rather "on the willingness of the buyer and a willing seller." The weak Dubai market pushed his firm to hunt down business in other Gulf countries, including Qatar, Bahrain, Saudi Arabia, and in Abu Dhabi, where Atwell says there is still plenty of work to be had. "In time, we’ve expanded, and taken on the competition. We’ve won some, lost some."

Though Dubai’s real estate market remains in the doldrums (average real estate prices are expected to fall another 15% this year, according to a May report from Bank of America Merrill Lynch) it helps to get perspective from others who have become successful in previous bust cycles. In the midst of the late-1980s crash, Canadian Linda Mahoney defied skeptics and set up Better Homes, a one-woman real estate company in Dubai. With a 20-year career as a surgical nurse and no previous real estate experience, Mahoney took a leap of faith. "I felt that, as long as I was willing to put in the time and effort required to build it, I could do well," she recalls. Now, more than 20 years later, Better Homes is the largest realtor in the Middle East, with a staff of more than 600 in 10 offices in the UAE, as well as in Saudi Arabia, Qatar, Kuwait, Jordan and India.

Mahoney says she wishes she had seen the market downturn earlier. "But when we did see it, we took action quickly. There were plenty of companies that were still in denial six months later. Reacting quickly was crucial."

Last year was painful, she adds, "but we survived in relatively good shape. Breaking even during such a difficult year was no small feat, considering the type of expenses we had. Once we realized what was happening in the real estate market, we consolidated very quickly. Within two or three months, we had closed down five or six offices and let go of at least 100 staff members. Our lack of debt also helped us cope with the downturn, as we weren’t facing any major repayments, which could have crippled us.

"But despite the need to cut costs and consolidate, maintaining our level of service was always in the forefront of our minds," Mahoney states. "You don’t want to build a company and all these services, only to tear them down when the first crash hits. Then you are no different from any other company that never had those services in the first place."