Up and Up!
Property development in Dubai is rebounding after the financial crisis.
In a 2005 interview to a leading media group, Damien Harrington, then associate director of CBRE, an international real estate firm operating in the UAE, claimed that he didn’t believe that the construction boom in Dubai was unsustainable. "Dubai has been expanding continuously for 30 years. There has never been a crash here," he declared.
The interview was printed in December 2005. A year back, in 2004, the rate of growth of Dubai's economy was almost 17 percent – four times higher than that of the economy of the United States.
This was the time when thousands of people, a large number of them investors, were moving to Dubai, one of the seven emirates comprising the United Arab Emirates. It offered them a tax-free environment, the promise of little government intervention and a safe place for investment in a region rife with volatility.
Harrington believed that Dubai’s future was bright and investors, especially in the construction sector, were of the view that the construction business would continue to grow as it would be several years before supply met demand.
Hardly two years later, however, in 2008, Dubai’s construction bubble burst in the wake of the global financial recession that saw some of the world’s strongest economies collapse. The impact of the crisis was so hard that real estate value in the kingdom fell by 60 percent in some cases. Real estate consultant and broker, Jones Lang LaSalle put the decline in value of
residential transactions even higher – at 65 percent – while their volume had decreased by 53 percent by 2010.
In 2002, the Dubai government had allowed foreign ownership of property in certain areas. This resulted in a surge in real estate investment as the growing expatriate workforce went on a spree to buy property in the emirate. According to some estimates, the price of property quadrupled in the six year following the 2002 decision. The construction bonanza continued as banks eagerly lent money. But soon after the financial crunch began in September 2008, banks across the UAE stopped lending. In no time, about 50 percent of Dubai’s real estate projects were canceled or came to a halt.
The ensuing panic saw hundreds of people fired from their jobs. Workless and without residence permits, people started leaving Dubai in hordes, leaving a number of housing units vacant. The price of property came crashing down. The example of Burj Khalifa, known as Burj Dubai formerly, is worth mentioning. Before the crisis hit, the price of office space in that building, as claimed by the developer, had reached US$4,000 per sqft. Some ten months into its inauguration, the price decreased by almost 40 percent.
The property doom that many had failed to foresee had arrived. It stayed for almost two years. Those two years witnessed major wheeling and dealing, one of them being the name-change of Burj Dubai to Burj Khalifa ‘to honor the UAE President, Khalifa bin Zayed Al Nahyan for his crucial support.’ Some speculate that the crucial support was in the form of a bailout that saved Dubai from going completely bust.
But as the sudden and largely unpredictable property boom of Dubai surprised people, its rebound also amazed many. The construction sector, especially, started picking up within two years of the disaster. One of the reasons was the emirate’s strict laws.
Many developers started to go back to their unfinished projects in order to complete them. The other alternative was to return all the advance payments to customers – a legal obligation which would have cost them dearly. The cost of walking away from these projects was much higher than completing them. Another reason was the decline in construction costs and low interest rates.
But most important of all perhaps was political turmoil and the eruption of violence in the Arab World. The Arab Spring, as it came to be known, resulted in regime change in many Arab countries. In the wake of violent protests and political instability, the affluent class in these countries started to transfer their wealth abroad. And what better choice of a country for an Arab than Dubai, a fellow Arab state?
As a result, while the economies of the countries that were affected by the revolutionary tides, almost collapsed, a surge was recorded in the buying and selling of property in Dubai. In addition to buying property, a large number of businessmen from the turmoil-affected countries also transferred their businesses to Dubai, thus contributing to its growth.
The surge in economic activity was so strong that Dubai recorded a phenomenal growth of 4.4 percent in 2012 – far better than that of many advanced economies of Europe and the U.S. Today, average property prices have once again reached high levels. Property investors operating in Dubai predict a further 10 to 15 percent rise in prices.
Words such as ‘tallest’, ‘biggest’ and ‘most expensive’ in the context of construction are once again a part of the lexicon in Dubai. The rulers have even announced another gigantic project – a new Taj Mahal which would be four times bigger than the actual mausoleum. Construction of many new shopping malls and hotels is also underway and the situation is more or less the same as it was prior to the 2008 crisis.
So will the current boom continue?
The sudden increase in property prices and frenzied activity in the construction and real estate sectors reminds people of the pre-financial crisis situation. There are concerns over the sustainability of this renewed construction bonanza. Fahd Iqbal, head of Middle East Research at Credit Suisse, a leading international real estate company, answers some of the concerns in an online article.
In his opinion, supply is now much more closely controlled than before as new development projects are primarily backed by government-owned developers. He gives the example of Emaar, a partially government-owned developer, which has announced two multi-billion dollar projects.
He also believes that “Dubai's legal framework, infrastructure and finances are much stronger than before. The RERA (Real Estate Regulatory Authority) has greater depth now, the escrow law has been established and a mortgage law is imminent.”
Another factor, in his view, is the improved cash flow in Dubai, thanks to its thriving tourism and trade segments. “The successful restructuring of the bulk of Dubai’s debts has left the emirate better placed to service its liabilities,” writes Iqbal.
These, and other factors, make Dubai the world’s favorite trade and tourism hub, not to mention the first choice for residence of many wealthy people. And by showing resilience and a remarkable ability to bounce back, Dubai has proved that it is a wise choice when it comes to prudent investment.