Revisiting Dubai - The Eye of the Financial Tempest

Last week I visited Dubai for the first time since 2003 as part of a study tour arranged by the Danish Press Association. I was excited to see the developments since then, as I participated as an e-Government Advisor in several IBM bids to the Dubai government, at that time Crowne Prince Mohammed Al Mahktoum, since 2003 now the ruler of Dubai.
The largest projects were the proposal for an internet based strategy for the government in 1999, followed by projects to fill the Dubai Internet City and later the IT infrastructure of the Dubai Marina Project. Both of these projects were nothing but a large mock up, a lot of desert sand, and for the Marina the diggings of the Marina to-be – a 2 x 4 kilometer swimming pool-like hole in the desert to be covered with white tiles.
It is said that ¼ of all building cranes are active in Dubai, and I think this explains why the growth of tall buildings, and entire cities have broken all known records (with the possible exception of Shanghai in China); The World’s tallest building (at least for some time), the Burj Dubai, will soon reach the 187 floors originally decided upon – but it may not stop there. Workers are adding 1 floor every second day.

The Dubai story began shortly before 1900 when Sheik Mohammeds grandfather decided on 2 key things: He lifted any customs on imported goods and he dug out the Creek. This gave rise to a lot of transit trade, and Dubai soon became one of the most active ports in Gulf, also working as a practical transit station for the British ships en route to India and back to Europe and UK.
When his son in turn decided to build modern harbour and began designing a whole new city with hospitals, schools, facilities to help trade, the modern Dubai began to take form.
Dubai found oil – but only a limited volume compared to Abu Dhabi, so it was clear from the outset of the oil boom, that Dubai had to rely on other income sources than oil, and trade seemed to be promising.
When the current sheik Mohammed as a crown prince began to make his name known in the region one of his first priorities was to secure Dubai as a leading nation in deploying and using IT and in particularly the new internet. Sheik Mohammed’s vision was to attract and create a complete new ’third industry’ based on modern technology – and by now, some 8 years after his first formulated strategy, he seems to have succeeded.
Tourism was likewise one of the key areas for development, and as one of the first attractions for wealthy tourists from Europe, US, Russia seemed to be the beautiful beaches, the coast line was too short, so the development advisor suggested to build a complete series of islands in the arabic Gulf; already now the coast line has almost doubled, and more Islands, the latest project ’The World’ is being build 4 kilometres from the cost line with sufficient capacity to host another half million residents and visitors.

The program for the study tour was really exciting – visiting the Danish Consulate to get the general information seen from a Danish Perspective – including experiences from a Danish developer and real estate broker. Then a meeting withEd O’Sullivan Middle East Business Intelligence a famous Middle East expert, briefing with the editorial staff of an up coming media star, Chief editor of Emirates Business 24x7 Riyad MickDady, Meeting with Gulf News chief Editor Abdul Hamid, Ahmed, with Al-Arabya TV, chief editor Nabil Khatib and finishing off with a in-debth discussion of Middle East security issues by Dr. Mustafa Alani and his staff from Gulf Research Center.

Starting with the property market, Lars Silberg Hansen from Larsen & Hansen, Dubai, explained the back ground and development going on 9in the real estate sector. It all came back to the so-called free-hold act 7 years ago allowing foreigners to own land and property in Dubai. As the tax rate is guaranteed 0 for the next 50 years, this led to an enormous boom, which is still accelerating:
229.000 new persons per year in 2007, 60.000 new companies registered in 2006 and 112.000 new companies registered in 2007! This has put a pressure on the real estate market, and it is quite normal that a flat or house is sold 3-5 times before the first inhabitant moves in – giving the investors a nice return. Rental is a good business for the developers as well with a yield of 8-12% pr. Year. The building boom is not directed towards the temporary workers, though. They can’t afford a flat at 200.000 Dirhams (50.000 Dollars) pr. Year, so they live in labour camps. 6-8 persons share a room, and as half of them work night shift, it is not crowded. Salary, security, dwelling conditions are in any case much better than in Pakistan or India, and since 6 years ago the developers acting as sponsors for the workforce, has been forced to offer them free transportation in nice busses and better working conditions, so the number of incoming labours seems to be secured.

The projects in Dubai seem never to stop; at the same time as ‘The World’ and the new Palms are being created, Dubai is finishing a sports city with the aim of hosting the Olympics plus a formula 1 track, and the World’s largest entertainment Park, Dubai Land, will be some 60-70 times the Disneyland parks in Orlando. Plus of course some 150 new hotels and an entire theme park to mirror the different cultures of the World. Also a brand new airport, 4 times the size of the current major international airport, is under construction. Plan is to attract 60 Million tourists pr. Year and keep them happy! The value of the on going building projects in Dubai is 1500 Billions US Dollars. And rising.

The general economic situation in UAE is excellent, only topped within the GCC by Quatar, the emirates average income pr. Person is 41K Dollars/year. Inflation has been running quite high, 10-12% in Dubai, mainly due to the housing boom, and as the oil in UAE is expected to last at least 30 years, the outlook is bright. You would expect that the recent drop in oil price from 150 $ pr. Barrel to a mere 65 $ took it’s toll, but as the dollar value have risen as a consequence of the crisis, the emirates are backing the dollar which is the basis for the Dirham anyway.
If UAE’s income from the oil is projected to 2020, the revenue will be between 3 to 5 trillions of dollars pr. Year. Variation based on an oil price between 30 and 50 dollars pr, barrel. This means that because the oil is so easily accessible in UAE, the costs are low. And the plans are to have UAE build refineries, plastic plants instead of shipping crude oil outside the region.

We learned that the general business climate as such seems to be at best not really stirred by the current crisis – the abundance of free funds in the UAE and in the Gulf Council Countries, and we also witnessed Gordon Brown on a courtesy visit to Sheik Mohammed and the Abu Dhabi government to ensure fuelling the British banks in the crises.
You could argue that as Dubai’s real estate and government funds may have a deficit of 40+ Billions of Dollars, it could be ‘high risc’. But nobody knows what the Maktoum Family’s wealth really is, and when all comes to all, the Abu Dhabi’s have at least an equal interest in Dubai’s prosperity, so this is where the trillions of dollars pr. Year from oil revenue come in very handy.

Ed Sullivan’s vision for the area is an intense growth from currently 38 million inhabitants in the GCC countries to over 100 Mio and Dubai-like cities along the cost from Ra’s al Khaima to Kuwait. Not only UAE, but also Quatar, Bahrain, Kuwait are booming.
He compared Dubai in the 1970’es with San Francisco in 1846, just before Gold Rush started.
Like San Franscisco, Dubai is now to 98% depending on anything but natural resources – it is a World class center for free trade with a booming building industry, a booming tourist industry and hosts a number of Hi-Tech companies and media companies. Plus the similar problem as San Francisco has with the density of cars and the traffic jams. Dubai is building it’s metro – and in one year from now the brand new metro will open it’s first part.

The open policy towards foreigners is not limited to tax exempts, free ports and increased efficiency in handling visas and work permits; also democracy as such is slowly spreading. In UAE a new council of 40 has been put in place – 20 of those are elected and the other 20 named by the Government of UAE. The interesting thing is that the government actually appointed several women, as the turn out by the elected persons where discouragingly low.

It was interesting to learn how the press and the media navigated in a political environment where they in theory could be closed any moment by the rulers in the various Gulf states. In spite of this – or maybe more correctly – because of this, they have been given a lot of what we will call freedom of the press. The new 24x7 Business paper expressed it this way, that even if their ambition was to get advertising money and their largest customers where from Saudi, they still pursued an open and fair analysis of business situations in the Middle East.

Similar views were expressed by the Al Arabya editor, Dr. Nabil.
30% of their advertising revenue came out of Iraq, their primary objective was free and accurate journalism. This had meant that 11 of the staff had been killed by various groups in Iraq since the war in 2003. Their editorial line is to be bold, and hence they weren’t that popular in Syria, Libanon and Palestine. This line is of course difficult in a basically conservative area, but nevertheless this is what Al Arabya is looking for – a balanced, objective line.

During our visit, the Global Economic Forum opened in Jumeira, Dubai. More than 700 international specialists, spokesmen and experts from academia, Government and Industry met to discuss the World Crisis. It was opened by Sheik Mohammed Al Maktoum, who called for a new World Order with much more responsible Governments and with a higher level of collaboration across the borders. This was not just because he just had to listen to Gordon Browns plea for assistance, but also because the true story behind what looks like and extreme liberal economy in Dubai (And UAE – where he is the Prime Minister) is in fact an attempt to control and balance supply and demand from the Government side – whether we are talking about public assessment of the value of properties and the regulation of the banks to a inquisitive attitude towards fraud in private companies. In fact, the UAE/Dubai balance between government and liberalism might be the cure we need right now?
So the Sheik is a benevolent ruler in the sense that there is room for everybody, but under regulated forms. It was interesting to note that some of our recommendations from the projects 5 years ago are now being finalized – for instance the issuance of smart cards and digital identities to all citizens in Dubai. By the 1. of January every resident inhabitant will have to have this, bringing UAE and Dubai to the top of the most advanced countries to have digital identities.

The only vague signs of the World crisis we observed during our stay were some of the top shops autumn sale with 75% off. But then again when a new Mall, the Mall Dubai opened on Friday afternoon, the roads were blocked by cars for several hours. Consumer confidence seem at a peak.

The week was completed in an excellent way by a private lunch at the Burj Arab, a seven-star hotel, overlooking the Palm, the Marina and the Jumeira Beach – with just a faint view of The World in the horizon. When you are sitting on the top of this extraordinary building you realize that there is no place like Dubai. A truly international melting pot with almost no crime, no problems with immigrants, a high standard of health care – but obviously also with access to ready cash at a magnitude nobody can really imagine – so even if the UAE shares fell 6% on Sunday Nov. 9, it didn’t have any real impact on the traffic in and out of Dubai airport this morning.
What could turn this place a part could be a serious security threat.
We will investigate this in another blog.