Tuesday, April 14, 2009

Whose money is building Dubai?

Something that's come up many times in conversation and on internet forums was raised again recently in a comment left here: Dubai is in trouble...they have over $1T in building projects... Who's funding them?

I've heard so many times: "Without the oil money they wouldn't be able to do it". Recently that's changed to: "Now the oil price has dropped the buildings can't be finished".

Time to put the reality in writing I think.

It isn't Dubai's money.

We need to go back to 2002.

The world was awash with cheap money, it was easy for people to get hold of sacksful of the stuff.

It was soon after 9/11. Arabs were meeting obstacles if they wanted to travel to the west, the US in particular. Bush W's administration and others were freezing assets, alleging terrorist connections. As a result money was being repatriated back into the Middle East.

So all over the world there was a hell of a lot of money looking for a home.

Sheikh Mohammed Bin Rashid announced the freehold era, decreed that foreigners could own property in certain areas.

The timing was not accidental.

So for those who don't know, here's how the whole thing works. I'll give you a practical example, Dubai Marina. It's just one of the many, many developments which have appeared since the decree, and it's typical.

Emaar is the Master Developer. The Dubai Government is the largest shareholder but as the company is listed on the Dubai Stock Exchange it has huge amounts of money from many other investors.

Emaar built the marina and put in the infrastructure. They also built, or are building, something like ten projects, from residential towers to a shopping mall.

But they sold the other 95% of the land to other developers, large and small.

Those developers designed and built residential towers and in turn sold the apartments to investors. Some of these investors are large companies or very wealthy individuals who bought whole floors, or even whole towers. Others are simply ordinary people who bought one apartment, either to live in or as an investment for their future.

It's said the two largest groups of end-investors are Brits and Indians. The properties were certainly aggressively promoted in those two countries.

Dubai Marina is a typical example of the reality of real estate in Dubai. Very little Dubai money is involved, the vast majority is from investors large and small from all over the world.

Government money goes into infrastructure, it's outside investors who are providing the bulk of the money for the buildings. Hundreds of billions of dollars have poured in.

Oh, PS. Oil revenues make up a tiny part of the emirate's economy. It varies with the oil price of course, but it's around 6%.


I've re-read what I'd written thanks to comments from The Real Nick.

A mistake in the fourth para - I should have said "Most of it isn't Dubai's money"


The Wizard of D said...


By the way, I am still one among the small group of residents who is still postive on the real estate front. Despite all the reports going around.

A large part of the current real issues are closely linked to the credit crises and its cascading effects on overall consumer sentiment. The UAE ecomony will probably bounce back earlier than most others.

What will happen is that long of the fringe developers and their projects will fall by the wayside before the credit situation eases and hence re-balance the demand supply ratio.

Mazhar Mohad said...

Well said. Only if general public had some sense to realise.

the real nick said...

Close, but no champagne.

What you forget to mention is that infrastructure spending dwarves the investment required for construction of individual buildings.
True, government owned developers spearhead developments to create momentum, but the government had to first turn sand into building land by developing those freehold areas first(-too slowly, one might add).

So, Dubai's money, or debt to be precise, is the ony thing that makes development by sub-developers possible, even though in the end the total investment and value created by foreign investors may well be in excess of Dubai's start-up infrastructure spending.

Take the Palm Jumeirah for example. The cost of building this fairytale nonsense (almost twice, since the first attempt screwed up) was far more than the cost of building the villas. The value those villas created were more than the investment, but you asked "whose money is building Dubai", not "who is making the most money out of Dubai's development?".

If your question had been the latter, you would have been right the answer is: foreign investors.

R. Ramesh said...

excellent analysis and wonderful comment by real nick..wish i had a little more dough to add, but u guys have said it all..cheers..only thing i can hope for is revival..because it's people who suffer in the end..i have 10 CVs of my friends who have lost jobs..

aslihan said...

thanks god somebody told the truth.

but economy is somethging very interesting that some times what whole people think is much more effective then realities on the future. becuse they made their choises as they think so as a result thay prepare the circumstances of what they think. so sometimes it became reality.

i think everythings gonna be fine after 6 moths or something.

rosh said...

"What you forget to mention is that infrastructure spending dwarves the investment required for construction of individual buildings."

Perhaps true Nick, though I'm curious how you know that for fact. Anyway, shouldn't comparison be infrastructure spending to market values of buildings, rather cost? Market values at point of sale is your revenues. Revenues v/s cost of investment is your potential return and a forecast to prospective profits yes?. And perhaps that's what you've said, positive returns = prospective growth, which fuels investment, returns and continued growth/profits?

"So, Dubai's money, or debt to be precise, is the ony thing that makes development by sub-developers possible,"

What about demand? Wouldn't increased demand, provide better credit/debt to DXB to borrow, built/invest for continued profits i.e continue the cycle?

"Take the Palm Jumeirah for example. The cost of building this fairytale nonsense (almost twice, since the first attempt screwed up) was far more than the cost of building the villas."

I'd think that's primarily given the nature of this project. They reclaimed land - i.e. they created land to be built on. Isn't COST of land more in value to COST of individual homes in most places anyway? Aside demand, I don't think my apartment in NYC costs $$ to built on, if it weren't NYC.

"If your question had been the latter, you would have been right the answer is: foreign investors."

Every sale of DXB SQ footage generated revenues for DXB. I'd think, the building boom GREW given demand, which fueled and/or inflated the value of land, positive returns, further investment, returns and continued growth/profits etc all.

I'd think, Seabee's Q & A, whose money is "building" DXB is quite apt.

the real nick said...


Yes, infrastructure spending exceeds construction cost.
I know this for a fact because the company I work for is involved in the construction of the new airport, several electrical substations, water desalination plants, and we were involved in the Palm Jumeirah, and we are also (for 20 years +) property developers in our own right.

If Seabee's point was that external money helps (helped) build Dubai's projects - largely through offplan sales - well then Okay, but that's stating the obvious, isn't it? Construction simply doesn't work without credit, anywhere in the world. Try buying materials without an LC. This is why Dubai's market has ground to standstill - because we cannot build, not because in the short to medium term there is little demand (because buying is a lot harder, too).

I stand by my argument that Dubai had to build the platform *)for the boom by itself - without foreign investors or end-users buying offplan. Nobody buys substations offplan. Which is why Dubai is now struggling to service their debt.

(*What is the "platform"? Anything that makes Dubai work. Electricity, water desalination plants, sewage treatment plants, airports, ports, roads.)

I think seabee was just attacking a Straw man. Who in their right mind actually thinks that Dubai built all this with their own pocket money?

Seabee said...

Nick, to reply to your two comments, the later one first:

I think seabee was just attacking a Straw man. Who in their right mind actually thinks that Dubai built all this with their own pocket money? As I said in the first para of the post, this has been raised with me so many times, latterly here on one of my posts. (I find it hard to believe that you've never come across the question). Because it's such a common misunderstanding I decided to write the post.

Then to your first comment: in fact your second para answers your own questions, and supports what I said.

Your penultimate para does the same. The infrastructure spending has been recouped, with profit, by the sale of the plots and the individual villas to investors.

Actually I don't really see what you're questioning. It's a simple formula and normal business practice - the original investor creates something which he sells at a profit. That's what's happened with Palm Jumeirah, Dubai Marina and the others.

Some, such as Palm/Marina, give a short term return because the plots (or villas) are sold immediately. Others such as Knowledge Village give a long term return because 'Dubai' built the whole thing but is recouping investment plus profits from leasing the properties.

Of course there's a much bigger and more complex real estate story than I touched on in the post, but I was simply addressing one small but often asked question.
If Seabee's point was that external money helps (helped) build Dubai's projects - largely through offplan sales - well then Okay, but that's stating the obvious, isn't it? No, not obvious at all, otherwise the question would't be asked so often.

the real nick said...


I don't entirely agree with your statement that infrastructure spending has been recouped with the sale of plots and villas to investors - because it hasn't (totally).

Some of it surely has but not nearly all of it. I think you seriously underestimate the cost of infrastructure development. The strategy Dubai Inc. applied to the "freehold" property developments is what the industry calls 'upsizing'. You create development opportunities where previously there weren't any, start with a loss leader investment but hold onto to a significant stake and ride the wave as it builds up. That worked fine for Emaar, Dubai Properties, Tatweer etc. in the short term.
Plots in Business Bay went for sale at around 150 to 200 Dirhams per squarefoot GFA x FAR = ca. 750 to 1,000 Dirhams / sqft. (That's around a quarter the rate of prime, established Jumeirah / Umm Suqueim land by the way.)

Why is Dubai in debt? Because infrastructure investment is inevitably long term, and the aforementioned strategy to generate state revenue worked only short term and now not at all: for example, where has Dubailand disappeared to? 'Mohammed BIn Rashid Gardens'? 'Jumeirah Gardens' anyone?

I can only guess the cost of the waterbody formation. The contract for the small extension of the creek via Safa park to the coast had a value of around 2bn Dhs alone. The cost of the 30 odd substations servicing Business Bay Phase 1 and 2 is around 800million....The development of Business Bay as 'CBD' destination is a zero sum game for Dubai Properties. Their only profit came from the Executive Towers which they developed themselves - the 'Dancing Towers' now being back in fantasy land. The idea was the (planned) long term increase of value of Dubai (and its land) as a hub.

So who is "building Dubai"? The offplan investors or those who make it possible by enabling development in the first place?

LDU said...

So if $1T worth of construction is in progress, has an equivalent amount been suspended for the time being?

Seabee said...

LDU, welcome back, I haven't seen you here for a long time :-)

The reports say that about half the projects are on hold, some of those having been cancelled. I posted some figures here.

kerimhann said...

Dear All,

You all have great points and I dont feel any of your opinions are incorrect. As an advisor and economist, I must add few points too.

Dubai's property market were driven buy 3 groups;

- Institutional buyers (stable investors like private equity firms with Saudi cash)

- Individual buyers (less than %3) those who will either live in or rent it out

anddddddd "brokerage firms" (around %64)

Having said that, these brokers bought many properties with %5 down payments with the clause in their contract stating that remaining amount will be paid after the completion of these projects. Now some of them were here to launder sum money so they are all set and they do not worry at this stage.

But major part of this group is either running away now or they will soon runaway specially after the school holidays. Why?

Because they have mortgaged dozens of houses with the cash they had. Imagine with 1 million aed you can not buy a single apartment as a lump sum but you could have mortgage an entire floor in business bay.

Many developers under the escrow laws must deliver projects this year or next year. These brokers were making money from buying a property with %5 down payment, selling it after few months with a premium to another broker (mainly new fresh yuppy brokers from India or Britain (Brits with Indian origin).

There were also other type of big bang brokers in the market who were acting as sole sales agents for some developers like Dynasty Zarooni, ACN, etc.

These firms were charging a "membership fee" for investors who wishes to buy properties from certain developers (mainly in Abu Dhabi). The membership fee for DZ was around 1 million USD per investor. (76 people are in jail now for this issue).

The question whether Dubai's property market will ever recover? has a simple answer: NO. Regardless of the government push, it will not.

Prices were never the actual prices. It was based on demand and speculations. Demand wont come back again as the new rules does not allow manipulations like before. I am expecting prices to go back where it was around 2004.

What next? Dubai can continue to be a holiday paradise and put its effort to be one as it still is not able to keep tourist more than average 3 days (Turkey keeps average 7 days, Spain 8 days and Singapore 4 days). Yet, it should offer more than malls, it should attract small budget travelers.

For expats, two option exists: save money and stay till the baloon you are in it bursts or start looking job in more stable economies.

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William King said...

Excellent. Well it has really been a topic to discuss for so many times. Although oil is the major factor of income for Dubai, we should not neglect the other factors like tourists loves to go there, every one has a wish to visit Dubai for once. Investors always have a deep eye on the business condition in Dubai and they do not lose any chance to invest bigger in Dubai. Real estate an property business gives also a huge amount of income. Specially now a days new housing schemes gaining much popularity in Dubai is big project to invest.