Dubai, How Bad Is It?
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.
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.