Introducing the top investor in Dubai property

Saudi Arabia: according to veteran Saudi financial consultant Motasher Al Murshed, speaking before the opening of the Jeddah Economic Forum.

He revealed to Arab News that the flight of capital from Saudi Arabia to Dubai last year was as high as $7 billion and a further $480 million in cash from the Kingdom ended up in the UAE stock market.

This helps to explain a conundrum that has been puzzling UAE analysts. Figures from the UAE Central Bank showed that total bank loans grew from $52.3 billion to $56.1 billion in 2004. This modest rise in borrowing was hardly enough to fuel the real estate boom we see today in Dubai.

So the huge inflow of foreign direct investment from Saudi Arabia looks a very important part of explaining what is going on. Now assuming other Gulf States such as Kuwait and Qatar, also with large oil surpluses, have been investing in Dubai - and they have been rather more public about it than the Saudis - and the picture becomes much clearer.

It has to be said that a real estate construction boom funded largely by equity is something of a novelty but not unknown in emerging economies. For example, the extensive infrastructure redevelopment of Chinese cities in recent years is down to the reinvestment of manufacturing income.

Most importantly such an equity-funded real estate boom is no financial bubble. It will not collapse due to funds drying up as so often happens in the industrialized world. What generally happens in such construction booms is that supply runs hugely ahead of demand.

Some people might suggest this is happening in Dubai but the figures do not support this conclusion as yet. The UAE population grew by 279,000 in 2004 to 4.3 million, and everyone knows that most of that growth was in Dubai resulting in a 20-25% hike in rentals and accommodation shortages.

By the time the high-rise construction projects now underway are completed the population of the city will have grown even bigger. Not everybody will want a high-rise condominium but there should be enough people who do to fill them up.

Of course the question is how long and how big the Dubai real estate sector can become before it becomes oversupplied. All the evidence from high growth economies suggests that we have not seen anything yet, and many of the recent project announcements that appear impossibly visionary will prove both attainable and economically viable.

When you look at Singapore and try to explain, how did a small town turn into a metropolis in less than 20 years this is also something beyond normal imagination. But it happened, and the same thing is happening to Dubai.