Dubai has been good to Chris Dommett. The 47-year-old banker moved to the
emirate 13 years ago and set up a property company. He found success – his
firm generated millions of pounds – and happiness. He met his fiancée,
Teresa. He never had any doubts about joining the ranks of a new white tribe
of Arabia. Until now. “I’m not sure the government knows how to get out of
this mess,” he said.
The global recession has ripped through Dubai, leaving its dream of becoming
the Switzerland of the Middle East looking like a mirage. Locals who used to
joke that Dubai would be a great place “when it’s finished” now wonder
whether it’s finished.
They’re counting the cost in Britain, too. The UK has invested more in Dubai
than any other country – an estimated £3 billion. British companies are owed
more than £400m by troubled state-backed firms.
Raw numbers confirm the desert storm. Property, the engine of Dubai’s growth
that at its peak last year accounted for more than half the economy, has run
into the sand. House prices are down by as much as 50%. Prices will fall a
further 20%, predicts UBS, the Swiss bank, leaving Dubai real estate the
worst-hit anywhere.
British investors have sunk some £200m into £1 billion-worth of property, much
of which is unfinished and some of which may never be. An estimated £335
billion of projects have been halted or are on hold.
Tourism, 20% of GDP last year, is down. Room rates at Jumeirah, its leading
hotel group, have fallen 25%, concedes Gerald Lawless, its Irish-born boss.
There are fewer bums on the posh seats of Emirates, the city state’s
airline.
Multi-billion dollar investments by Dubai’s sovereign wealth funds in foreign
assets such as MGM Mirage, the Las Vegas gaming giant, have slumped. The
market has fallen up to 70% from its 2005 highs.
Key state-backed companies, notably Nakheel, the developer, have either had
their credit ratings downgraded or been put on negative watch. The debt of
government and govern-ment-controlled firms has risen to $80 billion (£48.6
billion), more than the city state’s GDP. Almost $11 billion comes due this
year (including interest) and $12.4 billion next year.
Fears of default have forced the emirate’s rulers to dash to their wealthier
neighbour, Abu Dhabi, for a bailout of up to $20 billion, underwritten by
the Central Bank of the United Arab Emirates. However, bad though the
numbers are, there’s something more serious: something that strikes at the
heart of Dubai’s aim to create a pro-western, moderate Muslim capitalist
success story. Dubai is facing a confidence crunch.
The emirate depends on westerners, not just for investment, but to run its
contractors, banks, hotels and airlines. In the boom years, westerners
flooded in to get rich – outnumbering native Emiratis 10 to 1. Now that the
economy has slumped, many are questioning whether Dubai is the place to be.
With the school year about to end, UBS says the population, which is already
falling, could slump by as much as one third by year-end. A brain drain that
big could be devastating.
“Dubai is a pay-as-you-go model, dependent on foreigners’ money and talent,”
said Saud Masud, analyst at UBS, who came to Dubai from New York. “If
foreigners exit, there is a domino effect through the entire economy.”
What’s worrying many western investors is the way they say Sheikh Mohammed Bin
Rashid Al Maktoum, Dubai’s ruler, is handling the crisis.
They accuse the government of going into denial, at first. Then, when the
slump couldn’t be ignored, they say ministers failed to act. It was more
than five months after the collapse of Lehman Brothers before Sheikh
Mohammed finally negotiated the federal bailout and more than six months
before he issued a public statement on the economic crisis.
The government’s belated attempts to combat the down-turn are making it worse,
business leaders say. They point to the appointment, then almost immediate
removal, of a new spokesman for the emirate. Nasser Al-Shaikh,
director-gen-eral of the department of finance, was hand-picked by Sheikh
Mohammed in March to be the reassuring new face of Dubai. Last month Sheikh
Mohammed abruptly removed him. No reason was given.
Critics also argue that new visa rules are likely to damage the property
market. Dubai recently revised how it grants residency to expat homebuy-ers.
Instead of two to five-year visas, expats will have to renew them after six
months at a cost of almost $700 a time.
“We need confidence-boosting leadership but we’re not sure what the government
is up to,” said Dommett.
The confidence crunch extends beyond Dubai – tarnished by reports in overseas
newspapers, which, unlike local titles, are not censored. Press reports have
denounced the city state as “Neverland built on the never-never”.
Sheikh Mohammed is so concerned he has hired London-based PR group Finsbury –
run by Roland Rudd, a friend of Peter Mandelson, the business secretary – to
help ministers to speak out to reassure investors and business leaders. It’s
a remarkable U-turn.
“In the past, ministers went out of their way not to speak out,” said Frank
Kane, a British journalist who now runs a media consultancy in the UAE.
The man with the toughest job in the spin souk is Omar Bin Sulaiman, governor
of the Dubai International Financial Centre. He concedes that ministers took
too long to assure businesses and investors that they were tackling the
crisis. “While focusing on doing the job of fixing the problems, we did not
communicate that we were doing the job,” he said. Ministers would be more
open in future, he pledged.
Dubai’s $80 billion debt was being reduced, he said. State spending will
increase by 42% this year, creating thousands of jobs. Although it will lead
to a budget deficit of 1.3% of GDP, that figure is the lowest among the Gulf
states after Qatar.
Half of the $20 billion raised in the recent bond issue has been used to bail
out state-backed firms, notably Nakheel, he said. The remaining $10 billion
will be handed out by the end of the year.
He conceded that property prices were down by as much as 50%, but insisted the
worst was over. The latest survey by HSBC shows prices are starting to rise.
Dubai remains the Gulf’s preeminent service centre and will grow when the
region’s economy picks up, he said.
He predicts growth of about 2% this year, down from 8% last year and way off
the government’s projections of 11% a year from this year until 2015.
Can Sulaiman, dubbed “the man in white”, steer Dubai back into the black? Not
any time soon, said Masud. With the economy slowing and 100,000 homes due
for completion just as the population decreases, the economy could spiral
downwards, he argues.
“Lack of demand in real estate leads to economic slow-down which, in turn,
leads to job losses, which fuels further demand destruction. When do we hit
the bottom?”
Standard & Poor’s, the credit-ratings agency, says the economy will shrink
2% to 4% this year. Others are more sanguine. They point out that Dubai has
invested wisely in infrastructure – hard and “soft” – to become the
undisputed business capital of the trillion dollar Gulf economy.
Emirates is buying 58 Airbus A380 superjumbos at a cost of $55 billion and
will soon be operating from a five-runway airport. New roads carve oily
streaks across the desert and the Metro monorail public transport system has
just opened. Jebel Ali port is still one of the world’s busiest.
By promoting Islamic finance and encouraging women to go into business, Dubai
has also become a business hub for hundreds of thousands of Palestinians,
Syrians, Iranians, Lebanese and Indians who are unlikely to decamp to New
York, London or Paris.
Simon Williams, HSBC’s chief economist in Dubai, said: “Dubai is a $50
billion to $60 billion economy, integrated intoa trillion-dollar region.
Dubai works because the Gulf works and the Gulf is not going to stop
working.”
The one thing everyone agrees on is that the next six months are crucial.
“We’re at a tipping point,” said Dommett, looking out of his office at
half-built buildings.
“Dubai has brilliantly exploited the boom years to build itself on to the map
and into people’s minds. But Plan A is over now. The model only works in the
good times. We need Plan B and we need it fast.”
My son learned to ski here but he’s never seen snow
Michael Johnston-Smith arrived in Dubai two years ago and instantly fell in
love with the place.
The British-born property fund manager is a serial expat. He has lived in Hong
Kong, Beijing and Singapore, but he saw a long-term future for his young
family in Dubai.
It is not difficult to understand the attraction. His job with a Kuwaiti
property company paid well, the family home is five minutes from the Burj Al
Arab hotel and his children were accepted into the prestigious Jumeirah
English Speaking School.
“I saw myself here until retirement,” he said. “The schooling, housing and
lifestyle is great and we’ve been able to explore the Middle East.”
Johnston-Smith, however, will take a one-way flight to London this week. “I
lost my job earlier this year. I have done one interview a week, but nothing
has come of it. I got a relatively decent package, but we’ve been eating
into our savings.” The crunch came when he had to decide whether to renew
the lease on his property – in Dubai it is normal to pay rent a year in
advance.
He couldn’t take the risk. “The decision we’ve taken is a very difficult one,
but how much of your savings do you use up – some of it, or all of it?”
The 45-year-old does not have a job lined up for his return but said the
hardest part was breaking the news to his sons.
“They love it here. My seven-year-old learned to ski at Dubai Snow Park – he’s
a proficient skier who has never seen real snow. My wife has a great social
network around the school. Life was varied and exciting,” he said.
For some Brits Dubai still has a lot to offer. Dominic Treays, 32, set up the
Cragus Group, a tax advisory firm, two years ago.
Business is good, although the direction has changed.
“Companies still need tax advice, but we have changed as Dubai has changed.
The incorporation side of the business disappeared in December. There was
nothing, not even a smell until last month, when we had a few set-ups.”
Treays has also seen a change in the type of people now moving to Dubai.
“A lot were just coming out because it’s tax-free.The financial crisis has
been a blessing in disguise because all these cowboy types who just wanted
to make a quick buck have left.”
Treays is not sure if he will stay in Dubai, but he is certain it has a
future.
“The best way of looking at Dubai is by studying the architecture: you have a
skyscraper, a skyscraper and another skyscraper and you might think it’s
Manhattan but in between it’s just sand and the only way to fill in those
gaps is with time. Dubai has not had that time yet.
“It’s aiming to be London, New York or Hong Kong, but if it only ever becomes
a Miami, that’s still great. Forty years ago it was desert.”
