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Dubai, How Bad Is It?

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June 14, 2009 – Comments (22) | RELATED TICKERS: GAF , DIS , MES

Like many others I've been captivated by the media reports coming out of Dubai in wake of the financial panic. I followed the country with intense interest as it attempted to build itself into the regional financial, entertainment, and tourist center. The ambition and excess of its projects were so out of this world, seemingly into the realm of imagination, and were in such startling contrast to the culture and wealth of many of its neighboring countries.

 Literally, 30 years ago the country was a small fishing village with a couple low rise building hugging a creek. (See these pictures as an example: http://www.btinternet.com/~mthompson/photogall70.html). Today, it’s the home of the tallest building in the word, indoor ski slopes, vast housing tracts built into the sea, and a planned amusement park that dwarfs any ambitions of Walt Disney. Things have changed a bit in 30 years (http://www.amitabhkant.com/wp-content/uploads/2007/11/dubai_skyline3.jpg).

Was this kind of hyper-growth sustainable? Many were skeptical, especially when the country became a sort of Miami on crack, with speculators swooping entire condo projects within hours of going on sale. So, it might not come as much of a surprise that starting earlier this year reports started flowing out the country that indicated Dubai’s dreams were collapsing in on themselves.

The article that really opened up the floodgates was this startling New York Times piece:http://www.nytimes.com/2009/02/12/world/middleeast/12dubai.html

The article paints Dubai as the collapsed poster child of the credit bubble.

Its airport: riddled with abandoned cars of fleeing foreigners who fear imprisonment from debt loads accumulated through speculative real estate transactions and job losses.

Its malls: empty.

Its real estate market: collapsed and in a continued downward spiral.

The government: hiding the extent of the problem and eliminating transparency.

Bleak stuff.

Then later, an even more damning follow-up on the country came from Johann Hari from UK newspaper The Independent.  http://www.independent.co.uk/opinion/commentators/johann-hari/the-dark-side-of-dubai-1664368.html

As bad a black eye as the original NY Times piece may have been, this article kicked sand in the eyes of Dubai, left it on the side of the road, and didn’t look back. The article describes Dubai as a “less like Manhattan in the sun than Iceland in the desert.” Ouch, but perhaps an apt comparison. Due to its extremely dreary tone, Johann’s article attracted a lot of international attention, including several rebuttals (An example: http://dubaithoughts.blogspot.com/2009/04/most-vitriolic-piece-on-dubai-so-far.html, judge for yourself whether the story is all hot air.)

I personally, while never having been to Dubai, had to agree a bit with the author. I’ve long admired Dubai’s visionary plan, the country lacks the large oil reserves its neighbors contain, so to create a diversified, sustainable economy it looked to the information, financial, entertainment, and tourist services that could attract international talent and leave the country positioned as a “21st century economy.”

However, along the way things did seem to go off the rails. Their plan might have just worked, but so many projects in the country targeted the extreme affluent of the world population. This wasn’t a Disneyland, built for a target audience of middle class America, an accessible dream to the majority of the population. Instead Dubai’s large projects increasingly were aimed at the upper-crust of society, built upon the idea the credit-bubble world was sustainable long-run trend that they could best serve. Hmmmmm, bad niche, bad timing.

And yet, the country is showing some recent resilience. An article posted on Bloomberg yesterday (http://www.bloomberg.com/apps/news?pid=20601087&sid=a05h3xrKL9WY) talks about the Dubai index hitting a new high for the year. The driver? Emaar Properties won a contract to develop a kilometer tall skyscraper in Saudi Arabia.

Maybe excess isn’t as kitsch as its been made out to be.

The economics just don’t make sense to me. The problem with skyscrapers is that as they become taller, more and more space must be taken up by elevators, eliminating valuable rentable space and making them less viable. Innovative technologies can solve this problem to a point, but a building of this size is more sizzle than steak. It’s a means to attract attention to a country and/or area.

So, if Saudi Arabia is still looking to build exorbitant projects, is the death of Dubai greatly exaggerated? After all, if the idea of Dubai, a land of excessive projects meant to draw attention to the area, was teetering on financial oblivion as the articles above seemed to indicate, would other countries still be looking to follow in its path?

Further, part of the appeal of Dubai is serving the local gilded class that oil revenues created, who appear to still be confident enough to start on projects of unfathomable ambitions.  Even if their own country is now experiencing a slow-down, perhaps there’s growth for Dubai’s pseudo-state owned firms in surrounding countries who, despite fair warning, are trying to grow with their own Dubai like ambitions.

As an aside, personally, I'm greatly concerned that a country like Saudi Arabia starts a project like this. The country has struggled to modernize and become competitive in a global marketplace. In addition they’ve trained their population to expect such perks as little or no taxes, free education and other subsidies. These perks are only possible through oil revenue and not sustainable for more than perhaps another generation.

As such, projects like this scare me because they’re such a poor use of “oil capital.” I don’t believe building unprofitable mega-projects is a substitute for building better infrastructure and creating an accommodating political and legal structure to attract international firms and knowledge to a country. Dubai’s finding out the hard way right now that a poor legal system is a huge negative on international firms coming to your country. Its arcane bankruptcy laws have become the stuff of legends and negative press for the country.

In my book, despite some recent head-fakes to the contrary, Dubai still looks precariously positioned. From a regional perpective, despite increasing oil prices that should help stabilize budgets, the fact that such large and uneconomical projects are still going forward scares me tremendously. It all just seems so… Extra ridiculous in light of recent developments.

I just can’t see myself investing in a region that seems so oblivious to the outside world, where delusions of granduer continue unabated as the larger world experiences a shift to the prudent side. Maybe I’m not alone, a cursory glance at Middle East and Africa ETF’s show outside investors haven’t warmed up to their markets. The Market Vectors Gulf States ETF has a paltry $4.93 million in net assets. Squemish investors are afraid to venture into the area. Since the ETF seems to invest mainly in banks (lenders to real estate bubbles) and property developers (IE- Emaar, which despite recent positive news appears poised for a business drop off), its not exactly an ETF I'm interested in.

But what do I know? If anyone on CAPS has anything to say or a first-hand perspective from the region, drop me a line in the comments below. I’d love to hear more about what others think of the region’s short and long-term development.  

22 Comments – Post Your Own

#1) On June 14, 2009 at 4:39 PM, UKIAHED (37.49) wrote:

Nice, thoughtful post.  Lots to think about.  Rec from me.

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#2) On June 14, 2009 at 5:59 PM, Seano67 (27.65) wrote:

Wow. Great post, and great links. Sounds like a really messed-up place that probably deserves to be swallowed up by the desert once again, but that architecture there is just amazing. It reminds me a bit of the plans and models that Albert Speer and Adolf Hitler had collaborated on for Germania, which was to be the new name for Berlin once Germany had conquered the world. Just architecture on an utterly massive, fantastical, mythical, otherwordly type scale even as compared to the architecture of today. It almost looked like something out of Star Wars, to be honest about it. Just crazy, epic stuff...

Anyway, two thumbs up for this blog.

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#3) On June 14, 2009 at 6:16 PM, alstry (36.24) wrote:

Great Post.....I have many friends that have been to Dubai recently and your reflection is accurate. 

If you think about it....are we really much different?????

Actually, things here are much worse on an absolute level.....we have over 20 squre feet of retail space per person....Sweeden has about 3 feet.....and Canada, the next closest, has about half as much as we do.

Further, our government infastructure has grown far beyond our nations income to support it....we have a military costing hundreds of billions per year spread around the world....we have a social welfare system costing trillions.....and our nations income can no longer support it....

soon you will soon find out that our government is out of money...it can't afford to make much needed infastructure repairs, it cannot afford to support our current welfare system, and our military expenses are sapping our citizens earnings dry.....

It has happend to every great economic power before and it is now happening to us.....yet we just refuse to believe as millions are unemployed, tens of millions are getting massive wage cuts, food banks running out of food, sections of entire towns are being leveled, bridges in disrepair, tent cities sprouting up around the country and deficits growing to levels the world has never seen......

soon the money just runs out.....now the only question is how soon???

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#4) On June 14, 2009 at 7:20 PM, TMFRhino (98.24) wrote:

Thanks for the kind comments everyone.

 Also, see I got your ruminating on something new Alstry ;).

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#5) On June 14, 2009 at 8:19 PM, ttboydxb (28.91) wrote:

I wouldn't pay too much sense to the articles...

 

I'm a Canadian Expat living in Dubai. I'll take my tax free living, sipping a drink by the pool anyday, compared to paying over 50% of my salary for the Canadian Government to persue worthwhile endeavors such as printing documents and ingredients in both French and English and give $ to my friends who graduated the same time as me but decided to smoke weed all day. (AKA Welfare)

 

Funny how many people bash Dubai, and yeah stuff has slowed down, but articles like the ones above are WAY WAY  OVERBLOWN.  Now would I take my $$ and invest it all in Emaar??  NO, not enough transparency, but there are some promising companies out here, just have to do your homework like anything else. 

 

I really enjoy living here, and it was getting too crazy, prices going up 10% a month and so.  Now, the recession has flitered out a lot of the people who shouldn't have been here in the first place. I really recommed it to anyone as a cool place to visit, and as an expat, you're in an awesome part of the world, Asia, Africa and Europe (and the Maldives) within 5 hours.  

 

I posted in Altry's post that reading all this doom and gloom about Dubai, makes you realize how much the media Overblows things, which has really affected me on seeing how some media reports put CAPS members into fear induced comas about their 401k's and wether they should be building bomb shelters in the basement. 

 

My 0.02

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#6) On June 14, 2009 at 8:25 PM, Seano67 (27.65) wrote:

I would definitely love to visit it, just to check out some of that crazy architecture.

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#7) On June 14, 2009 at 8:54 PM, Alwayzwrong (94.35) wrote:

You touched upon a very key point that most would overlook.  I am speaking of the clientele that Dubai caters to (especially when you compared to that of Disney).  I'd like to also draw a comparison to Mocsow, if someone has also travelled there.  With all this money suddenly pouring in, developers built 4- or 5-star hotels.  Moderately-priced hotels were ignored, because they were replaced by what were once fine Soviet-era hotels.  $400/night rooms abound in newer hotels.  There are virtually none below $250 (even lower-quality, old hotels can run for more than you would expect).  One reason Disney World, or many other successful tourist havens, succeed is that they provide all levels of services for all societal classes.  Virtually anyone with a stable income may afford to visit, but the vistor's experience can be tailored to their income level.  Thus, lower-income visitors, who are just happy to be there, can take full advantage of all attractions, while higher income visitors can pay for additional services that separate them from the "average" person.  Las Vegas excels at this, as well.

Dubai, put all their eggs in a single basket.  Their enitre tourist economy was devoted to business-class or wealthy visitors.  With everything being relatively new, there was nothing to "step down" to.  It's too late to reinvent themselves as a cosmopolitan city, because the entire world isn't made up of single businessmen (expats) or obscenely wealthy individuals.  Why would someone travel around the world to visit Dubai?  I've never met anyone who's ever visited that wasn't a 1) engineer or 2) in the financial services industry.  And none went for a vacation.

 I was travelling in H.K.--talk about staying in an expensive hotel--with a friend when we first heard of the amusement park in Dubai (I've worked for Disney; he's visited all their parks around the world).  Even he balked at visiting, saying "who in the hell is going to Dubai.  I think I might have to pass on that one."

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#8) On June 14, 2009 at 9:11 PM, ttboydxb (28.91) wrote:

I disagree,

 

I work in aviation, and out of the 100 odd people I work with, ALL of them have friends and family coming out here, for VACATION.  Yup.  Now you do have one point where they didn't really think of catering to your "Average" traveller who doesn't want to spend $1000 a night.  

 

BUT, you have to see how many Premier Inn, and Holiday Inns are being built now!  I've seen a few, and they all have advertising on the side of the building of 350 dhs a night, any night!  (About $98 US)

 

I personally think this recession was just what the doctor ordered for a place like Dubai.  They realized some things very very quickly (ie you can shirnk as fast as you can grow) so should be better positioned for future growth, slower growth, but sustainable growth.  

 

Emirates Airline is one of the only airlines in the world that is growing (albeit at a slower pace then before)and the city opens phase 1 of it's metro on Spt 9th, again, making it more and more "tourist friendly".  

 

I am in no way some blind "Everything here is great" person, but I think it's a really cool place to live and for tourists to visit. My family has already come twice from Canada, and love it. 2 different friends and their wives have come and loved it. (From the UK and Amsterdam)

 

So while it's not a completely "cosmopolitan" city yet, I wouldn't completely write it off, I think there may be a couple of cities out here in the gulf that really lure a lot of people in the next few years, Abu Dhabi, Qatar and also Muscat in Oman.  

 

My 0.02 

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#9) On June 14, 2009 at 9:43 PM, Seano67 (27.65) wrote:

Was just reading about the construction workers riot and strike that took place during the construction of the Burj Dubai (and the sympathy strikes taken part in by thousands of other workers at other locations across the city) due to the low wages, or wages simply not being paid at all, and the lousy living and working conditions they were forced to deal with. These guys caused an estimated $1,000,000 damage in that riot, and apparently worker unrest is only getting worse. So I would say that the Emirs of Dubai had better hope and pray to freaking Allah that all those exploited and oppressed workers don't band together, organize and unite, cause they could cause some real problems for their oppressive overlords.

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#10) On June 14, 2009 at 9:52 PM, tonylogan1 (28.24) wrote:

Good article... got me thinking about some things that are not in the MSM too often.

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#11) On June 14, 2009 at 10:05 PM, Seano67 (27.65) wrote:

I really have to admire their attempts to make something out of nothing. I mean really, had they not built all this, Dubai would be a Bedouin sandpit with absolutely nothing to recommend it and nothing in its favor. They've got no oil, as oil only accounts for around 8% of its GDP. So they went all in on creating this global financial center and wild, futuristic tourist mecca.

However, it's obviously wrong that they should be exploiting impoverished workers from Africa and East Asia like that, and generally things like that have a tendency to turn around and bite ya right in the tookus. 

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#12) On June 14, 2009 at 10:16 PM, TMFRhino (98.24) wrote:

ttboydxb,

Thanks for the feedback. As I touched on in the original blog post there's been some blowback to the original Johann Hari (Dark Side of Dubai) article, so I posted a dissenting opinion to attempt to balance it out. I was trying to be as objective as possible in weighing Dubai's future, hopefully that came through in the post, and your first hand perspective is appreciated.

I think you make a very astute point about the media, a piece like 'Dark Side of Dubai' that only focuses on the negatives will always get quite a few more eyeballs than a more even handed article balancing the treatment of workers throughout the country rather than a specific location where there might be isolated abuses.

Also, regarding the points Alwayzwrong made in his post (Great comments BTW, the way many of these "new money" cities concentrated on attracting only the extremely wealthy has always surprised me.) despite the recent addition of Holiday/Premier Inns you talk about, it seems like there's quite a glut of premier and luxury hotels built recently and quite a few more planned.

What's your first-hand view of some of the larger luxury hotels/condo unit supply? Has the city been saturated to a level where it doesn't make economic sense to continue building luxury units for a long while. For example, the poster child of the US housing bubble, Miami, has some forecasts that say it might have enough excess condo units built from their building boom to have sufficient inventory for the next 15 years. Since we don't always have great transparency into the country, have you seen apartment rents dropping, hotel specials, etc.?

Also, you describe not wanting to invest in Emaar but say there's other promising companies. What kind would that be? IE- What local industries, investable industries are holding up best through the downturn?

 Any first hand experience is of course greatly appreciated.

 Thanks!

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#13) On June 14, 2009 at 10:30 PM, TMFRhino (98.24) wrote:

SeanO67,

 To be fair, I wouldn't put too much stock in the second article with regard to work treatment. While I believe the author did find workers in such conditions, I'm sure treatment varies between each construction company. I've spoken to other people who worked in construction management within the country that said workers generally received what they came for (higher wages to bring home at the cost of very harsh conditions).

That being said, I agree with your final point, it could come back to bite the country in the 'tookus'. Anytime you have a class of people within your country who belong to a lower social strata, it'll cause long term structural ills.

So, their attempts to save costs now by bringing in low cost workers may come to bite them in the behind later when they have to remove the workers when construction slows. To me, its a recipe for social unrest trying to force those workers out; the other option would be to bite the bullet and assimile a large number of uneducated workers into their country. However, I don't see that happening, so more social unrest it will be.

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#14) On June 15, 2009 at 12:32 AM, kaskoosek (79.63) wrote:

I would have to agree with ttboydxb on this one.

 

I was in Dubai in Jan, a lot of the articles in the media are just fluff peices.

 

Nevertheless living in Canada is much better.

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#15) On June 15, 2009 at 4:04 AM, Seano67 (27.65) wrote:

I think I would find it difficult mentally to invest in any company directly located in the Middle East. The situation just seems too dodgy over there alll the time, always some kind of turmoil or instability either taking place or threatening to start, and always the possibility of war breaking out. I've considered putting money into several Israeli companies over the years, but I just couldn't do it due to my feeling that hostilities could break out at the drop of a hat, and that things could instantly change and go right to hell just like that.

Or maybe that's just my perspective from here, and it's really not that bad. I don't know, but I do know that I would not feel comfortable putting any money into a region that has got those kinds of simmering tensions going on.

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#16) On June 15, 2009 at 5:58 AM, ttboydxb (28.91) wrote:

TMFRhino,

 

You bring up some good points,  give me a day or two to do some diggin around into exact numbers, and I'll write my 1st blog, in response to some of the topics brought up in this one?

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#17) On June 15, 2009 at 10:08 AM, TMFRhino (98.24) wrote:

ttboydxb,

Works for me, I look forward to it.

 Thanks!

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#18) On June 15, 2009 at 10:34 AM, whereaminow (24.34) wrote:

That New York Times article was very amusing.  Any currency that is tied to the dollar is going to boom/bust if the dollar is artificially inflated by the Federal Reserve.

Of course, no one mentions the $627 BILLION Sovereign Wealth Fund that the UAE has to ease the blow.  That's kind of a big deal.  A little better safety net than taxing the hell out of everybody and loading up on debt.  It helps keep the tax rate low (currently so low that it doesn't exist - the UAE individual income tax is 0%.)  So rebounding from this disaster will be pretty easy.

Sovereign Wealth Funds are an interesting concept.  The revenue for the funds comes from the oil industry, which is privately owned by the ruling families.  The families, in turn, use the funds to provide for the less fortunate.  It's a bit more like Rockeller humanitarianism (if Rockefeller was also supreme ruler) than say National Socialism.  Not that I'm a fan of either one (supreme ruling leads to ugly things), but one is clearly better financially for the citizenry.  Since the ruling family has an active interest in getting wealthier they actually think long term.  For example, it was reported last week that the Qatar Sovereign Wealth Fund is looking to take a 25% stake in Porsche.  That's not exactly the same thing as National Socialism now is it?  But the results are a lot better for everyone.  Qatar and the UAE are amazing places to live if you can stand the heat. (A difficult task admittedly. It was 110 today.)

David in Qatar

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#19) On June 15, 2009 at 11:10 AM, TMFRhino (98.24) wrote:

Hey David,

 You mention the $627 billion sovereign wealth fund, but that's Abu Dhabi's haul, correct? Dubai's primary wealth fund comes in at $82 billion and then they have a couple offshoot entities to fund major projects. However, I don't think you can really use the different Emirates funds when applying to one another.

If push came to shove, Abu Dhabi might help bail Dubai out in the short run, but in the long run it seems they're each looking out for themselves primarily. Feel free to dispute that idea.

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#20) On June 15, 2009 at 11:38 AM, whereaminow (24.34) wrote:

TMFRhino,

That is correct, but I am guessing (admittedly) that the ruling families of each emirate have a mutual interest to keep the others afloat, and have investments that overlap.  Dubai's own fund is nothing to snort at either (I think it's larger than all U.S. funds combined), but Abu Dhabi is the King of SWF's.  

My point was that Dubai has used their wealth less recklessly, with a long term view, that allows them the opportunity to recover quickly. Personally, I haven't been to Dubai since 2004 so I know a lot has changed since then.  But their fortunes are similar to ours in Qatar, where real estate prices have dropped as well.  It's just a lot easier to cope with a paper wealth loss when no one pays individual income tax (except us stupid Americans making over $95k) and no services are interrupted. 

Also, I would like to comment on the "cars left at the airport" phenomenon.  That has nothing to do with the crash.  I've been in the ME since 2002, and that happens all the time.  I've seen hundreds of abandoned cars when times were great.  Usually it's low paid foreign contractors that don't like their jobs or the heat and just take off.  For a long time, foreign credit bureaus wouldn't cooperate with the Arab governments so there was no risk for the fleeing party.  

David in Qatar

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#21) On June 18, 2009 at 2:31 AM, dexion10 (27.80) wrote:

extremely insightful / thoughtful post! - rec from me

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#22) On June 18, 2009 at 9:41 AM, carcassgrinder (40.76) wrote:

Abu Dhabi is the King of single white females...Thank You David..this is the most valuable information I have  ever taken from CAPS...a thousand thanks!!

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