After five years of severe economic restrictions, some markets are starting to show strong signs of recovery. Stocks are back to pre-crisis levels, real estate is hot again and banks are in good shape like if nothing really happened. Nowhere is that more true than in Dubai, where very few seem to have learned the lesson.
The United Arab Emirates gained independence from the British rule in 1971, and oil started to be produced that very same year. The emirate of Dubai however, remained with only a 5% of the landmass of the UAE, and the majority of oil and gas reserves of the country stayed in its neighbor Abu Dhabi. This was well known by the rulers, Al Maktoum family, who started to diversify the economy at the end of the 1970s and beginning of the 1980s. The creation of Dubai World Trade Centre and Jebel Ali Free Zone and significant investments in infrastructure set the right environment to attract foreign companies and expatriates alike.
But it was not until the 1990s when the West started hearing about this emirate. Kuwait and Bahrain, the most prominent financial services hubs in the Gulf until then, suffered from the Gulf War and from sectarian problems, respectively, and Dubai became “the happening place”. At the beginning of the 2000s, the emirate started to build extravagant real estate developments, such as the Palm or the World, and the economy started relying on free trade, tourism and real estate.
Banks got very excited with the dreams of Dubai and started providing large and cheap debt, contributing to a highly levered construction market. Inflation peaked, and had to be capped at 15% by the Government in 2006-2007. And then, Lehman happened and the whole financial system collapsed. For an economy that had moved from oil production to real estate and financial services, this was a nightmare.
In 2009, the economy of Dubai fell a 2.4% and the fancy apartments of the Palm became empty. Expats had no choice but to fly away, leaving their luxury cars abandoned at the parking of the airport. The situation was critical, and Abu Dhabi was the only one able to solve it. Unofficial figures estimated the outstanding debt of Dubai at $80bn, a quarter of which Abu Dhabi would have bailed out – and is still due to receive. As a gesture of gratitude, Burj Dubai, the world’s tallest building, was renamed and inaugurated in 2010 as Burj Khalifa, in honor of Abu Dhabi ruler.
Four years have gone by. Dubai has relied on the strength of its logistic and financial sectors to start attracting again large amounts of tourists and workers. Given the slower recovery in Europe and US, one can find international executives that had never considered leaving their countries, as well as young grads keen to start their career in any large financial hub (and tax-free, if possible), that are very bullish on the Middle East, particularly on Dubai. If this was not enough, the city was chosen at the end of 2013 to host of the Expo 2020, an international event that didn’t enjoy much recognition until Dubai marketed it the way it did.
Winds are blowing very favorably in Dubai 2.0. Indeed, this seems just an improved version of the Old Dubai. The GDP (both oil and non-oil) is growing again at a strong pace, the balance sheets of the banks and companies are healthy again, and the real estate is stronger than ever. Buildings keep flourishing everyday in Dubai, and are sold even before they are finished.
But there are other important considerations to be made. Of the 2.1m of inhabitants of Dubai, less than 17% are locals. Foreigners were not allowed to buy apartments in the UAE until 2002, and their money is now accepted just temporarily. Because no matter how much money you invest or how many years you spend in the country, you will never be granted citizenship or retirement rights. So, it is a difficult place to call home.
Anyone that has lived in the emirates has noticed the dichotomy of traditions and innovation. Emiratis keep wearing their thawbs, smoking their shishas and praying five times a day; but at the same time, they want to develop cutting edge technology and to build the world’s most known developments. And it is this constant battle between the past and the future that will be the largest threat to Dubai 2.0, with human right activists and international conflicts entering the scene from time to time. That, and the real estate bubble, of course.
