Dubai's Oil-Fueled Real Estate Boom Raises Fear of a Bubble

DUBAI - Dubai's economy is booming, thanks to record oil prices and surging real estate values. The Dubai Financial Market has more than tripled in value in 12 months. Each week brings more news of record profits for companies and announcements of yet another gigantic construction project. The $1 billion Burj Dubai, for example, is planned to be the world's tallest building at more than 800 metres (2,625 feet) when it's completed in 2009.

From 1990 to 2004, Dubai's gross domestic product quadrupled to $27 billion, according to the Dubai Department of Economic Development. The total volume of trade through the emirate increased 41 per cent in the same period to $59 billion. Now, some government officials say the emirate is growing at a speed that may threaten Dubai's future - and those of its six partner states in the United Arab Emirates.

"The drive for economic development which has been promoted by certain emirates, such as Dubai, will be shot in the foot,'' says Sultan bin Nasser Al-Suwaidi, Governor of the Central Bank of the UAE.

Al-Suwaidi says he's concerned there might be a stock-market correction that could affect real estate prices and economic growth. Such growth has been driven by government and private spending on roads, property development and other projects.

Since 2002, citizens from outside the ArabIan Gulf's oil- producing monarchies have been allowed to buy homes in sun- drenched Dubai, the second-largest emirate in the UAE.

Dark side: In addition, Dubai's Emirates airline offers daily flights to financial centres such as New York and London. There is no income tax, and corporations can repatriate 100 per cent of their profits in return for a yearly fee.

"The dark side of any boom is rising inflation, and that's what we're seeing in Dubai,'' says Daniel Hanna, Middle East economist at Standard Chartered. Prices for goods and services rose 10 per cent on average last year, twice the national average, Hanna says. Frankfurt-based Deutsche Bank and Tokyo-based Nomura Holdings have issued reports this year saying that share prices have outpaced earnings expectations in regional stock markets, including Dubai.

On August 30, stocks on the Dubai Financial Market were at 1067.2, up 140 per cent since the beginning of year.

"Market valuations across the Middle East and not just Dubai are unsustainably high,'' says Ali Samir Al-Shihabi, chief executive officer of Rasmala Investments, a Dubai-based investment bank.

Record oil revenue: Dubai and the UAE, the fourth-largest oil producer in the Organisation of Petroleum Exporting Countries, have been raking in record oil revenue. In the six Arab states that surround the gulf, oil earnings will increase 25 per cent to $250 billion this year, according to London-based Standard Chartered, a bank that generates about two-thirds of its income in Asia.

Oil for October delivery rose as much as 82 cents, or 1.2 per cent, to $70.63 a barrel in after-hours electronic trading on the New York Mercantile Exchange. Prices have gained 67 per cent in the past year. While Dubai pumps just 160,000 barrels of the UAE's total output of 2.4 million barrels each day, the emirate is benefiting as international companies choose it as a centre for their business in the region.

The Hague-based Royal Dutch Shell, Europe's second- largest oil company, has quadrupled the number of its employees based in Dubai to about 500 during the past three years. Nonresidents face fewer restrictions than in Saudi Arabia or Kuwait. Women are allowed to drive cars, for example, and alcohol is available. More than 80 per cent of the emirate's 1.2 million people are foreign citizens, predominantly from India, Pakistan and the Philippines.

Average personal income : Rents in Dubai soared as much as 34 per cent this year compared with 2004, far outpacing the 1.5 per cent growth in average personal income, according to a March report by Dubai- based GulfTalent, an online recruitment service for professionals in the Middle East. Rent is now equivalent to almost a third of average income compared with 26 per cent last year.

"If Dubai becomes much more expensive than the surrounding countries that we are here to serve, then it becomes inefficient to remain here,'' says Louis Hakim, a Lebanese national who's Middle East CEO for Royal Philips Electronics NV, Europe's biggest maker of consumer electronics.

In a cost-of-living index compiled by New York-based Mercer Human Resource Consulting for 144 cities around the world, Dubai jumped 10 places, to 75th in 2005 from 85th last year, to become more expensive than Washington and Toronto.

A two-bedroom unfurnished apartment rents for about $1,800 a month in Dubai - 20 per cent more than in the US capital, according to the survey, which compared costs for more than 200 items, including housing, transport and food.

Tax benefits: Michelle Dooley, 34, a business development manager at the Australian Consulate in Dubai, says recent increases in the cost of living have eroded the tax benefits of working in the emirate and are likely to drive many expatriates away.

"It's starting to affect companies' making decisions to come here,'' says Dooley, one of 6,000 Australians working in the emirate. Since Dubai opened its real estate market to nonresidents, the emirate's largest developers - Emaar Properties, Nakheel and Dubai Properties - have built more than $2.6 billion worth of homes, offices and other buildings, according to Shuaa Capital, a Dubai-based investment bank that manages more than $2 billion of assets in Arab markets.

Shuaa expects that figure to more than double this year and next, to $5.6 billion.

Palm-shaped island: Among the projects nearing completion are a man-made, 11-kilometre-wide (6.8-mile-wide) palm-shaped island off the Dubai coast where English soccer players David Beckham and Michael Owen have bought luxury homes. A villa can sell for as much as $2.2 million on the island, one of three being built at a cost of about $15 billion.

The pace of construction is prompting fears of a real estate bubble. After as much as doubling last year, prices for homes have levelled out, and in some areas declined, as supply has caught up with demand, says Peter Riddoch, CEO of Damac Properties Company, Dubai's largest closely held property developer.

For those who've bought real estate to lease, the risk now is that rental prices will decline, according to a March report by the National Bank of Dubai, the emirate's largest lender.

"You will have a decline in prices toward the end of the year because a lot of housing units will be complete,'' says Al-Suwaidi, the central bank governor.

Possible terrorist attack: Another threat to real estate prices is a possible terrorist attack, something Dubai has so far escaped. The UAE may become a target for Islamic militants hostile to Western influence in the region, according to a September 2004 report on investor risk in the gulf compiled by Kroll, a New York-based US security firm.

"Dubai is the Bali of the Middle East, and it's difficult to see how it can remain immune from terrorism seen elsewhere in the region,'' says Charles Hollis, Kroll's Middle East director.

"It's arguably now the most tempting target for Islamists.''

In a region plagued by unrest, a city can lose its allure suddenly. Manama in neighbouring Bahrain was the gulf's main commercial centre until the 1991 gulf war, when Iraq targeted it with Scud missiles. After the attack, Citigroup moved its regional headquarters to Dubai from Bahrain.

Chilling effect: Dubai is already showing signs of the chilling effects of inflation. In GulfTalent's March report, 9 per cent of respondents said they were considering leaving the UAE, citing rising costs, among other reasons.

"Dubai's economy cannot sustain inflation that we've seen over the last year,'' Rasmala's Al-Shihabi says. And Dubai faces increasing competition in the region. Almost 400 kilometres away, Doha, the capital of Qatar, is spending billions of dollars of its oil revenue on new airplanes, roads and hotels and on marketing itself as a destination for business.

Next year, Qatar, in a bid to raise the country's international profile, will host the Asian Games, a sporting event held every four years that features athletes from 45 countries.