Dubai's real estate highlights regional boom, Part I

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. Arab investors are using their funds to purchase land and build themselves or to buy wholesale from established developers. Dubai's Marina Towers complex, although overseen by Emaar, one of the largest local developers, will be mostly built by smaller construction companies or trading families. Alternatively many investors have bought entire apartment towers as an investment. The phenomenon is not unique to Dubai. Bahrain's USD 1bn Amwaj Island project is 60% sold out. Work has begun on Jeddah Towers, a USD 500m residential and commercial project in Saudi Arabia and one of the largest private investments in the Kingdom's history.

However the scale of Dubai's real estate boom has overshadowed the rest of the region. There are specific factors to the Emirate. Population growth has been strong and the practice regarding freehold ownership has changed. The Ministry of Planning anticipates that Dubai's population will reach 2m by 2010 implying an annual growth rate of 8% over the next six years. Given that average population growth since 1997 has been 7.5%, and Dubai's plans for expansion into new economic sectors, the number looks achievable.

The decision to allow non-Gulf citizens to purchase freehold property in certain areas has also played an important role. Although some legal uncertainties remain, expatriates have already begun buying properties. By allowing freehold ownership the Dubai government hopes to attract more skilled professionals to stay in the Emirate. It will also help Dubai achieve its aggressive tourist targets. By international standards property is cheap and the Emirate is an attractive and competitive place for a second holiday home, particularly for sun seeking Europeans.

Until US interest rates rise or oil prices fall, liquidity is unlikely to diminish and appetite for real estate will remain high. We believe that both factors will not change dramatically over the next twelve months. Oil prices may ease and interest rates rise but only at the margin. The boom in both construction and investment in real estate projects is likely to continue for at least another two years.

In the second article in this series we will examine how sustainable the current surge in real estate investment is, and its impact on the UAE's economy.