Inshallah, Build it and They Will Come

For a property virgin in the region, the City Scape 2009 real estate expo in Dubai was over-the-top nutty. Even for a city that has seen a 50% drop in property values in 18 months, the projects they have planned are limitless in their imagination.

Not content with one giant archipelago of manmade islands in the shape of a palm tree…they built three. But even that wasn’t enough; they built a replica of the Earth in islands…surrounded by the sun, the planets and the universe, three hundred high-end real estate islands. The only trouble? They’ve run out of money and investors. Two of the palm islands are washing away in the waves…to say nothing of the Earth, the sun, solar system and universe. But that doesn’t stop the dreamers from trying to fund new projects.

We’ve spent the week essentially living in an ultra chic mall. Our hotel is connected on one end to the largest mall in the world. In this part of the city, New Dubai, everyone – the expats, the imported workers, the Emeratis and their guests – basically live inside because it’s too hot to go out. It’s quite literally the desert. The whole new city is comprised of tall buildings with dusty constructions zones in between. Each parchment of land that isn’t under construction is a patch of shifting sand. Yet, something like three out of five building projects have stalled completely…the contractors have just walked off the job.

The mall we’re attached to has every high-end store in the world. They have a Galeries Lafayette bigger than the one in Paris. Then every brand name you can imagine. BCBG Maxazria. Versace. Bloomingdales is opening a 4-story store in January. Armani has a cat walk right in the middle of the mall. There’s an ice rink and aquarium in it, too. Outside sits a faux lake surrounding the Burj – the world’s tallest building. Every night there are fountain displays choreographed to Arabic, Indian and African music. The fountain shoots water 50 stories in the air. Boats will be installed to help you move around the lake, like a water taxi in the Inner Harbor in Baltimore. It’s a fantastic design, in the pejorative sense.

While meandering about the place it’s hard to stop asking basic questions: who will be sitting in the French, Italian, South African, Lebanese restaurants being opened along the shores of this new paradise? Who will be shopping in these “fashion forward” boutiques? Who will occupy all the thousands of units of office space and what kinds of business will they be engaged in? Who will live in the hundreds of tall dark glass towers?

Each of the expats we’ve run into have been scratching their heads wondering what the fate of their business or job is going to be. The locals don’t seem to care one way or the other. Still, there’s zero unemployment, because once you don’t have a job… you get exported. The laborers who’ve been imported from India, Nepal, Thailand, Vietnam and Pakistan are on two-year visas. Once they’re jobs are up…out they go.

Yesterday, after wandering around the immense real estate expo for several hours – replete with expansive models of future fairy tale development projects yet to find financing – we walked into the stock market. It is housed conveniently in the building next door, which itself was the first high rise built in the city back in the 1970s. I was asked by a young man near the door to leave my camera, but there was no security to speak of. We just walked out on the floor where the Emeratis were trading stocks, all wearing their white dishdashas. Despite the fact that we were there half an hour before the close, many of the stocks listed on the board reflected zero trades had been made during the session.

Still, last night, while having martinis in a bar on the 63rd floor of the Address hotel in the shadows of the nearly kilometer-high Burj, our friend Peter Cooper, a British expat who has been a witness to the Dubai experiment for 14 years, helped put the whole city into context. The Sheiks used to invest all their money in the West, he explained. But after 9/11, the Patriot Act, the wars in Iraq and Afghanistan, they were afraid their money wasn’t safe anymore. They feared it was in danger of being confiscated.

At the time, they didn’t really have anywhere to invest it…so following the precedent set by Hong Kong in the ’50s and ’60s and Singapore in the ’70s and ’80s, they set out to build a world class financial center overnight. It has caused several booms and busts and all kinds of crazy property development plans, because they had way more money to work with when building the city out. And it’s even weirder right now because they’re only a few months off the bottom of the latest bust. Still, the city is still full of Russians, Iranians, and Pakistanis with money, all looking for somewhere to invest safely, too. The city is a bit like Switzerland in World War II; there is war and political intrigue all around them, but for the time being, they’re putting up a stoic front and seeking to provide a tax friendly haven to all. At least, we believe that’s what they’d like you to think.

Peter was encouraged by the number of people at the real estate expo. Last year the convention center was a ghost town. In the years before they’d been packed with investors from all over the world. Michael Douglas, Catherine Zeta Jones and Michael Jackson lived here and helped promote some of the local investments. The number one tennis player in the world, Roger Federer, famously moved to, and trains in, Dubai.

But after the bust…no one comes around anymore. This year, the construction on key projects like Burj has started up again. So the feeling and hope is that the bottom is in and a new sense of reality has brought back “bargain hunters”. Two years ago Donald Trump gave the keynote address at the expo, this year he sent his son, Don Jr., to do the honors.

The sheiks and property developers, with their remote heir of superiority, don’t lament the bust. Inshallah is a local term meaning, more or less, “god willing” or “we don’t really know how these things will work out, but we have faith they will.” And in some cases they have – phenomenally well. The Burj is a perfect example. As the story goes, when the design for the tower was first being shown to the Sheik, it was meant to be the second tallest building in the world. To which the sheik responded, “Why not the tallest?” It seemed preposterous…and yet there it is, towering just outside the window to my hotel. All of the units in the building were sold before building even began.

The five-star Atlantis Hotel at the tip of the first Palm Island is said to have only taken 18 months to start turning a profit. In that light, some of the fantastic plans at City Scape almost sound like good business. Provided, of course, investors continue to answer the beckoning call of Dubai from the far reaches of the earth.

Further, there is a sense that booms and busts are the best way to build the infrastructure for their new world-class city overnight. The government in Dubai is spending nearly half of its annual budget on roads, bridges and modern energy and communications systems. One gets the sense that if these busts persist, the national government in Abu Dhabi will just throw money down the pot until the next boom begins – even if that’s years away. Here in Dubai, there is little money from oil or gas, it’s mostly trade, Western conglomerates setting up shop in a low tax jurisdiction and real estate. And, since the bust…debt.

We are, in fact, off to Abu Dhabi today. According to our German-born Australian friend Dr. Andre Homberg, Dubai is like the call girl beckoning the world to take notice of the capitalist miracle burgeoning here in the desert, but Abu Dhabi is like the queen – regal, relaxed and rich. The GDP per capita in Abu Dhabi is reputed to be $60 million. The real estate projects in Abu Dhabi exhibited at the expo were more highly visible than at previous affairs. Many of them are more subdued than the fantasyland projects of Dubai – they target the world’s richest. They promise to bring the green revolution to the desert…and to assuage an over-the-top fascination with Formula 1 racecars and Arabian horses.

Abu Dhabi is the only of the Emirates in the UAE to “earn” their money from oil. Businesses there open at 10 AM and close at 3 PM – “Abu Dhabi” time, they call it. But they, too, are afraid of Peak Oil and emissions regulations clamping down on the era of cheap oil. So in the newspapers and around the shisha bars you hear discussion of the UAE’s entrance into the nuclear era. The government is buying French technology and planning to build nuclear reactors under the sand, then pipelines for wires extending all the way to Europe. They expect to be able to sell energy to European consumers for $0.05 a kilowatt, thereby maintaining their position as low cost energy providers to the West.

The other night, Andre introduced us to a Bahrainian-Qtari whose mother was an Iranian-American. His name is Mo. Mo works for a state-owned media company in the capitol city. Today, Mo is prepared to show us all the amenities Abu Dhabi has to offer if we’re interested in moving our publishing operations to his great city… The same amenities he apparently wooed Forbes publishing with. They’re opening a new office in Abu Dhabi in the spring. If Dubai is a bastion of low-tax speculation, booms and busts, Abu Dhabi appears to be a well-oiled (sic) government-sponsored machine. We’ll have to let you know how our meeting with Mo goes.


Addison Wiggin
The Daily Reckoning

The Daily Reckoning