Penthouse Gypsies Flock to Dubai
As the sun sets over this desert country, it bathes everything in a whiskey-colored tint. The still cranes perched on unfinished buildings look like ruins.
But when the sun disappears and inky darkness fills the sky, Dubai’s cityscape lights up and takes on a magical quality. Crowds fill its restaurants in the evening, the apple-scented smoke of the shisha in the air. “I love Dubai at night,” my host and friend — let us call him Andy — said as we sat out drinking and chatting on the balcony of his flat. “It’s like something out of Arabian nights.”
Andy is an example of what Addison Wiggin (my publisher and companion on this trip) and I have come to call a Penthouse gypsy. They go where they are treated best, wherever in the world that may be. They have money, own businesses and invest in real estate. They are smart and independent and value their privacy. And they aren’t living in the U.S. or the U.K or Europe.
Andy’s apartment sits on a man-made island in the middle of a man-made lake. It’s called The Old Town Island, even though it’s brand-new, because it looks like a part of old Arabia — or at least the old Arabia of Hollywood and Westerners’ dreams.
The Old Town Island stands in sharp contrast with the ultra-modernity of Dubai’s signature buildings, with their curves and sail shapes washed in multicolored lights. These structures give Dubai the air of an eccentric rich man’s playground. There is a casual indifference to costs. Only the rich could build such things in deserts.
For example, The Old Town Island sits next to the Burj Dubai, which is the world’s tallest building, at 2,684 feet. That’s nearly twice as tall as the Empire State Building. (The Middle East, by the way, held the record for tallest building for 3,900 years — thanks to the Great Pyramid of Giza — before the West took the crown.)
The Burj Dubai hotel will open soon. It is a symbol of Dubai, of its ambition and can-do spirit, its boldness and its wealth. By 2008, Dubai had as much property under development as Shanghai — even though the latter has a population six times as large. Everywhere in the world, there is a tug of war between utility and a desire to build pretty things. In Dubai, though, utility seems to lose. Instead, the goal is to make the largest, longest, tallest — you get the idea.
At the Burj, the smallest suite is 7,200 square feet. The electricity needs of this building in the desert are enough to power a small city. Think of just the power needed to pump water to its upper floors so you can flush a toilet. No wonder Dubai and the UAE (of which Dubai is a part) are starved for power.
No wonder, too, that the UAE has the largest carbon footprint per capita of any place on Earth. People here also use more water — 145 gallons per day — than any other people anywhere. Yet there is no river and hardly any water resources. The water resources Dubai enjoys comes from turning seawater to fresh water.
One question I kept asking myself on this trip was how sustainable all this is or could be. But that leads to some interesting and surprising answers about why Dubai exists at all.
Four Reasons Why Penthouse Gypsies Love Dubai
Don’t assume that Dubai is like Las Vegas, a sort of Arabian Disneyland in the middle of the desert. There was a reason why people settled here long ago — and why the Penthouse gypsies do so today.
The old Dubai actually had the best of the creeks of the southern Gulf. I visited the twisted old creek while in Dubai. Dhows still make their way across the Gulf to Iran, India and East Africa and back again, as they have for centuries. There isn’t a container in sight in this old port. The big commercial port in Dubai now is Jebel Ali — the world’s largest man-made port. But in this old port, goods are offloaded by hand, largely on the backs of Pakistani and Indian workers. The goods are stacked right offshore — sacks of pistachios, crates of cigarettes, boxes of toothpaste and other goods.
Dubai, then, is a port city. Its main business is trade. The ruling sheiks opened up Dubai as a free port to the world — no taxes, no hassles. “Free trade was mother’s milk for Dubai,” writes Jim Krane, author of the excellent City of Gold: Dubai and the Dream of Capitalism. Trade is what made Dubai wealthy. Dubai has more in common with the Venice of the 12th century… or with Singapore or Hong Kong today.
As with all free ports, it has had a history of being a haven for smugglers. Early on, traders would smuggle gold through here on its way to India. Gold, guns, slaves, diamonds, drugs — all ran through Dubai.
Of those, gold is the key driver. Dubai is still called the City of Gold. There are gold souks all over. People here seem to love their gold. While I was there rumor spread that the GCC — along with China, France, Japan and Russia — were having secret meetings in which they were planning to stop pricing oil in U.S. dollars. (The GCC stands for Gulf Cooperation Council and is made up of the six Gulf states, including the UAE.) Instead, a basket of currencies would replace the dollar. This basket would include gold. True or not, it helped generate some buzz in the gold market, sending gold to a new all-time high.
Today’s real boom in Dubai depends on a few key factors, and it’s not all about oil money. After spending some time here, chatting with Penthouse gypsies like Andy, I would boil it down to four successful ingredients:
Low regulations, low tax. This has probably been a Dubai advantage for a hundred years, but people here told us repeatedly how easy it is to set up shop in Dubai and how your privacy is protected. There are also no income, property or corporate taxes. Zero. (The city funds itself with taxes on hotel occupancy, liquor sales and restaurant meals, as well as permits for roads and such. Part of the budget also comes from the Sheikh’s business interests — such as Emirates Airlines and the aluminum smelters.)
In 2002, Dubai allowed foreigners to own property in so-called “freeholds.” That was a big milestone that kicked off a wave of immigration. So now there are these freeholds where the Penthouse gypsies live in high style in very nice communities.
The backlash of Sept. 11. Before Sept. 11, Middle Eastern oil-exporting countries reinvested $25 billion a year in the U.S. After Sept. 11, that slowed to about $1.2 billion a year. Arabs no longer felt welcome in the U.S. and feared what might happen to their wealth. So guess where the money went?
Arab wealth started flowing back to the home countries. The economies of the eight states of the Gulf Coast grew 60% from 2001–08. “Cash poured into Dubai,” Krane writes. And Dubai’s growth rate topped China’s, averaging 13% per year.
Essentially, the repatriation of Arab wealth from the U.S. was a big driver and still continues to be today. As the Middle East region gets wealthier, a good chunk of that wealth will flow through Dubai.
Finally, the UAE fixes the value of its currency to the dollar — at least for now. What this means is that as the U.S. printed dollars, the inflationary effects were exported to Dubai. That put Dubai into trouble. Lots of speculative capital flowed into building islands in the shape of date palms or creating residential communities with robotic dinosaurs from Japan. Now Dubai is suffering through a massive real estate bust as a result (to the advantage of the Penthouse gypsy).
Still, Dubai’s important position in world trade is many layered, like a wedding cake. As Krane writes: “Dubai today is the Middle East’s capital of commerce, one of its biggest recipients of foreign direct investment, its top financial center, biggest port and airport and home of the largest number of foreign businesses.”
Quite a list, considering air conditioning arrived only in 1967. Today, Dubai is a key crossroads on the New Silk Road. It fills the gap between New York/London and Singapore/Hong Kong. And as long as Dubai is kind to money, the Penthouse gypsies will come.
For investors such as you and me, the Dubai story is part of the greater New Silk Road. Dubai’s and the New Silk Road’s booming populations need food, water and power. The increasingly larger cities need infrastructure. Its growing wealth needs a storehouse of value. On this latter front, the Penthouse gypsies we met all prefer gold and/or a mix of currencies, such as Norwegian kroner and Singapore dollars.
November 12, 2009