Dubai's real estate highlights regional boom, Part I (page 1 of 2)

Nowhere is the current economic boom in the Middle East more tangible than in the United Arab Emirates. The hosting of the IMF meeting last year, in the aftermath of the war in Iraq, underlined the growing economic influence of the Arab world's third largest economy, and one of its most diversified. Abu Dhabi remains the financial powerhouse and political centre of the Federation, but it is the changing skyline of Dubai that has come to symbolise the UAE's dynamism.

Dubai's Department of Economic Development (DED) released estimates showing the Emirate growing by 6.2% last year in nominal terms. The number looks cautious, but the main cited source of growth - construction - is undeniable. There is no doubt that Dubai 's emerging role as the region's trade and service hub has in part been due to the development of world class infrastructure in the Middle East. For example, the Jebel Ali port facilities, the airport and the creation of tailored business parks, such as the Dubai Media City. However over the last twenty-four months the construction sector has moved from providing the necessary foundations for economic growth to being its main source.

Government infrastructure projects, such as the new airport terminal and the development of Dubai International Financial Centre, have been joined by large scale private real estate projects, such as the Emaar Marina Complex of 190 new residential towers and plans to build the world's tallest tower, Burj Dubai. Last year saw the unveiling of a tourist and residential project called Dubailand, which alone has an estimated cost of AED 18bn (USD 4.9bn).

Spending appears to be accelerating. Local trade journals report that AED 20bn (USD 5.4bn) of new construction related projects have been tendered since the beginning of this year. The three largest Dubai based real estate developers have plans to deliver ventures worth an estimated USD 7.3bn (AED 28.3bn) over the next five years according to local sources. Indeed the government expects USD 50bn (AED 184bn) in real estate investment by 2010. Evenly split that implies a yearly spend equivalent to 36% of Dubai's 2003 GDP per annum for the next six years.

An understandable boom...

Three key factors are driving activity. First, the historically low level of international interest rates has cut debt servicing costs and allowed companies and households to borrow more. Second, there is a lack of obvious investment opportunities. The end of the 1990's equity bull market and the low level of current bond yields have led to an unusual amount of uncertainty over future returns from traditional investments. Real estate tends to offer a predictable income as well as the possibility of capital gains and has performed well over the long term. Third, global liquidity is high. There is a lot of cash chasing few assets.

This is doubly true in the Middle East, thanks to the high price of oil, the weakness of the dollar and a wave of repatriated investment. Money supply data captures some of the scope of liquidity in the regional economies. M3 growth averaged 10% in Saudi Arabia in 2003. In the UAE the last available data shows quasi money up 23% y/y (September 2003).

Increasingly in recent years Middle Eastern investors have sought to invest closer to home. However local investment options are limited. The equity and bond markets lack depth. Hence the current focus on real estate in the region.