Dubai's new mega projects likely to face many hurdles

The recent spate of announcements in Dubai has sparked debate about whether the government has reverted to an over-exuberant mindset that was prevalent during the boom years and which eventually led to the property market crash.

The largest of the new projects to be unveiled was Mohammed Bin Rashid City, which consists of 100 hotels, the world's biggest shopping mall and a Universal Studios theme park. Dubai quickly followed up that announcement with the unveiling of plans for a new $2.7bn entertainment complex in Jebel Ali that will feature five theme parks. Other projects that have been announced in recent months include a $1bn replica of the Taj Mahal and a canal connecting the city's business district to the sea.

"Given the number of major real estate announcements over the past few weeks, one could be forgiven for thinking that we were back in 2006 and 2007 again," said Alan Robertson, CEO of Jones Lang LaSalle MENA. He believes the recent announcements can be seen as a positive for the market in the long term provided the developers adopt some of the lessons learned from the property crash. Chief among these lessons is to avoid developing real estate too quickly and to take a long-term and coordinated approach when rolling out the various phases of each project.

However, while noting that all of these projects signal that confidence has returned to the market, Robertson says financing will be a key challenge because banks remain wary about lending to real estate developments. He predicts that the level of available finance will act as a natural anchor, limiting the number and timing of the announced projects that proceed.

Gavin Samson, managing director of Christie + Co, Mena, agrees that financing these mega projects will be problematic for the developers. "Prior to the bust most of these projects were driven by off-plan selling of real estate. It was somebody else's money. But in this case Dubai will have to go to banks or its own banks for financing or will have to start looking at other financing vehicles, and people are not talking in a very positive manner about this (being achieved)," he said.

Still, Samson says Dubai's emergence as an airport hub is one of several factors that potentially make these mega developments viable. "Dubai has 50 million people coming through the airport each year, with only about 10 million of them staying in hotels. If we can get a further chunk of that 50 million to come and stay that alone could be a basis for saying there is room for all these mega projects," he said.

But Samson was also quick to point out that the massive scale of some of these projects has left some analysts questioning whether proper due diligence and demand forecasting has been done to prove they are viable. "How have they come up with the figure of 100 hotels? I simply don't know, but I very much doubt that there is a study out there that says there should be 100 hotels built within this (Mohammed Bin Rashid City) development," he told AMEInfo.com.

Guy Wilkinson, managing partner at Viability, also says he would have many questions about the feasibility of some the new projects. "Someone needs to ask about whether the largest shopping mall in the world will steal business from the other large malls in Dubai and continue the process of killing the small malls, or whether on the other hand it will increase the total number of visitors who love shopping and thus will fill up all the malls in Dubai and not just this one" he said.

As for the challenges posed by building theme parks in Dubai, Wilkinson said: "Let's be a realistic. Dubai is a hot climate, so there are certain months of the year when you're not going to want to be wandering between attractions at a theme park. Even if they are shaded, you're going to need air conditioned corridors, and those normally are not financially viable."

The large number of hotels slated to open in these developments does not pose as great a concern for Wilkinson, who says there is room for more supply in Dubai, especially of branded budget hotels, but he warns that it would not be feasible to roll them all out in a relatively short period of time. "I would hope their plan is to open 100 hotels over 20 years and not five," he said.