Bursting with confidence
Talk of the construction bubble bursting is never far, but Dubai has confounded doom-mongers.
Talk of the Dubai construction bubble bursting is never far away, but to date the world's fastest growing city has confounded the doom-mongers. Jamie Stewart looks at the factors that continue to threaten the industry.
They come in their thousands. Investors from all walks of life. From the US, Europe and the GCC. They populate Dubai's swanky restaurants and 5-star hotel rooms, busy preparing for the next salmon and lobster-fuelled property launch.
There is, however, one thing that links them all, whether male or female, Asian or Australasian, rich through hard work or inherited wealth; each is attracted by the smell of money emanating from the GCC construction boom.
The wealth of investors looking to make a quick buck from the roaring economies of the GCC nations is driving demand for residential property ever onwards. As Western markets stagnate and housing prices fall, the GCC is a magnet for those who may previously have sunk their millions into property elsewhere.
This glut of investors is maintaining and driving confidence in the market, convincing developers to hoist up yet more tower blocks, announce some more serviced apartment complexes, and throw some more parties.
But the lack of long-term investment and absence of end-users looking to purchase property has rung the alarm bell. Last month the press reported a possible 50% capital gains tax on properties bought and sold within a period of 12 months, as a means of dissuading short-term speculators. The towers are being built, and are certainly being purchased, but just who is going to live in them?
One of the more recent launches aimed predominantly at investors was the Platinum Two Tower in Dubailand being developed by the UK-based ACW Holdings.
The tower is being sold as a high-yield, freehold investment opportunity. Put simply, the income from rental of the apartments is entered into a pool, the costs are removed, and return for investors correlates with the area of property that is owned within the building.
ACW quotes a return of up to 45% per year via the pooling system, though general manager Ian Pask is careful to stress that there are no guarantees.
Returns therefore depend on continuous growth in the number of visitors coming to the region. Tourism is expected to grow by 7.1% annually until 2020, against a global average of 4.1%, according to figures presented by ACW at the launch of Platinum Two.
When considered against the backdrop of the myriad properties under construction that will be aimed at the same section of the market, substantial growth is necessary if such predicted returns are to materialise.
"Hotel occupancies right now are at about 85%," said Pask. "Maybe with all the serviced apartments and hotels coming on it won't be running at 85% year round but it will still be running at a pretty high rate."
By contrast, US hotels over a 25-year period average a 65% occupancy rate.
Pask also highlighted infrastructural developments and said: "We have the new airport being built in Jebel Ali, so Emirates will be pumping people in soon. It's not going to be like Heathrow in London where you have to pay for your slots and disappear; they want aircraft to stop here. They want Dubai to become the hub for this part of the world," he said.
The status of the country as an expat friendly nation is a further factor for consideration.
"Dubai is obviously very pro-business," Pask said. "In the UK, traditionally we would invest in Spain or Portugal, where we could only go on holiday, or go and work in catering. The difference is you can come to Dubai and work in any industry you want to within reason. I think it has got a long way to go."
Despite the confidence that many maintain in the market, there have been episodes of late which have rocked investor confidence, such as the cancellation in March of Damac's Palm Springs project on Palm Jebel Ali.
The value of the land assigned for the project had almost trebled in five years. Investors accused Damac of reneging on the deal in order to sell the land at a higher rate, and threatened court action.
Livid investors later stormed Damac's launch of Jumeirah Village South at London's Carlton Hotel, to warn other potential Damac investors. The firm was forced into a humiliating climb-down, announcing that the project was back on.
Such incidents do not only reflect badly upon a single company, but on the market as a whole. Few investors would be willing to risk their hard earned cash in the wake of such a debacle.
A foreign affair?
Looking to the bigger picture beyond the internal workings of the market, the geo-political climate of the Middle East is notoriously unstable. If events were to conspire that led to a drop in confidence in the region, then the cash balloon that investors have been blowing up within the property market could rapidly start to deflate. With nobody left to rent to, investment would run dry, and construction would cease.
The current escalation of the US - Iran situation is a good example. If diplomacy, hard talk and sanctions failed, and the West turned to a less than diplomatic approach, would this have a lasting effect on the industry?
"I think it depends on your nationality whether or not you would still come here," said Pask. "If you were American you would probably choose not too, but then I don't think many Americans come to the region at the moment anyway. When the war was going on in Iraq, it didn't necessarily stop people from coming here."
Pask recognised that there is a risk, but also gave the de rigueur answer favoured by the industry at present: "There is terrorist threat throughout the world, and there are wars throughout the world," he said.
"I think places such as Iran and Iraq are all far enough away from Dubai. There is always a threat of terrorism. Isn't there a threat to doing something in London?"
True. But London remains thousands of miles away from the majority of those who may wish to cause its populace harm in the wake of force being employed against Iran.
A week into July, in a display referred to by the world's media as "sabre rattling," Iran demonstrated its capability to hit Israel, test firing nine long- to mid-range missiles. Israel is 1250 miles from what are considered to be Iran's main missile sites, according to reports. Dubai, by contrast, is 150 miles away across the Arabian Gulf, give or take. But a cataclysmic turn of events involving the West and Iran remains the worst-case scenario.
In Dubai, the construction industry is testing the boundaries of its own capacity to build, evident in ongoing project delays caused by materials and staff shortages. Though completion dates are consistently pushed back as a matter of course, the towers are getting built, if a little late.
A look at Emaar's Dubai Marina, with its ongoing tower block developments jammed together like pine trees in a forest, is evidence of just how much residential property is set to come online by the end of the decade.
A second prime example is Emaar's flagship Downtown Burj Dubai development, with its cluster of tower blocks around the Burj Dubai, set for completion before the decade is out.
Moody's Middle East senior vice-president Philipp Lotter says that Dubai may be home to 5 million people by 2015. But he believes the city will find a way to support an influx of new residents. "There are many areas that the government is promoting to become components of the Dubai economy," said Lotter.
"Financial services will be significant, as will new industries such as aerospace. There is an initiative to attract trading and export firms to the region. There is also growth in insurance and oil service businesses such as Haliburton. It is all reflective of Dubai's ambitions to diversify its economy."
But Lotter said the process must be managed carefully. "If the government wants to ensure the market is not flooded with oversupply (of residential property) it must monitor very closely the numbers coming into the country. For the last two years we have had 200,000 per year. If that can be maintained then 5 million by 2015 is achievable.
"You must also factor in potential for economic slowdown. There is evidence that the region is far from immune to the global downturn. The supply chain must be able to keep up with demand."
Nakheel CEO Chris O'Donnell said that there is a limit imposed by the market itself. "There is very clearly a construction capacity constraint in Dubai and I estimate that to be somewhere between 80,000 to 100,000 dwellings a year," he said.
"Currently we are seeing market conditions impacting upon the industry. It's just the natural forces of the industry doing what it does best. It provides a constraint. You may want to build 500,000 dwellings in one year, but we'd all say 'that's probably not such a good thing for Dubai,' and the fact of the matter is, you cannot build that number."
But Dubai continues to push the boundaries of its own constraint. And there are other, more concrete, threats to the construction bubble bursting in the region that do not necessarily rely on speculation, rumour, dire predictions and 'what-ifs.'
A report published in July by the UAE investment bank Al Mal Capital should provoke more than a ripple of concern among the region's contractors. The report was compiled specifically for Arabtec, the UAE's biggest construction contractor, with ongoing projects such as the Burj Dubai and the US $2.72 billion (RUB 64 billion) Okhta Centre Development in Russia to its name.
The report highlighted the forces operating within the industry that are likely to affect the future expansion of Arabtec. The same factors therefore apply, by association, to any other regional contractor, because all are exposed to the same industrial forces.
The report highlights inflation and labour shortages as the main factors hindering contractors.
It said: "The main risks to our expectations for the current environment to continue are the rising costs of materials and a shortage of skilled labour. (These factors) have consumed the construction sector in recent months, squeezing margins of smaller contractors.
It also said: "we do believe that the lack of skilled labour in the region could seriously hamper Arabtec's expansion plans inside and outside of the UAE and could impact our valuation going forward."
Sameh Hassan is chief executive officer of Madar, one of Dubai's biggest steel traders. Hassan recognises contractor's woes in the face of soaring inflation.
"The price of steel has gone up dramatically since the beginning of the year, due to many factors. Producers are waiting to see if the raw materials will continue to increase in price and contractors are waiting to see what will happen," said Hassan.
"You can only read the trend in the market as best you can. First of all we should look at raw materials, and second, demand. Not just in our region but in the other parts of the world, because we are competing for the same steel from different sources. We should also look at energy, and we should look at freight."
Jim Freeman, managing director of Freeman Consultants, a construction recruitment consultant operating in the Middle East and Asia Pacific region, said: "The construction boom is driving the labour shortage. Skilled labour from India and Pakistan is thinly spread across all Gulf states. The situation is exacerbated because the skilled labour is now a lot smarter then it used to be. Workers will move all around the GCC countries, or simply back home."
Freeman said the contractor, or even the recruiter, must invest in the labour force to lessen the turbulent effects of a deteriorating shortage. "The industry needs to start training up more of the labour force, and identifying those with the spark or willingness to learn another skill," he said.
"That means setting up trade schools and incentivising workers to raise the medium. Some recruitment firms are actively doing just that to raise the skill set of their work force.
"Whatever way, contractors and developers are going to be hit in the pocket. There is no quick fix. What is happening is purely supply and demand. It's not going to go away until the boom is over."
In a transparent attempt to safeguard the various parties involved in the construction process the Real Estate Regulatory Authority (RERA) was launched by the Government of Dubai in July 2007. RERA was mandated to improve rule making and raise awareness about Dubai real estate procedures, following a series of legal tussles and property disputes.
All those with a vested interest, from the casual investor through to those who make a living in Dubai construction, will be hoping that the present boom will lead to a sustainable city, with space for everybody, inclusive of both blue and white collar staff.
Executive vice-president of the Trump Organization Eric Trump is a relative newcomer to the Dubai property market. It's a safe bet however, taking the family track record into account, that his is a valuable opinion. The Trump Organization recently launched the Trump International Hotel and Tower, to be built on Dubai's Palm Jumeirah in partnership with Nakheel.
Trump believes that Dubai is building a solid foundation for the future. "I'm a believer in circular markets. I believe that every single market will rise, readjust, then rise some more," he said.
"Will there be adjustments in Dubai? I think any developer who denies there will is being very foolish. Do I think they will get hit hard and for a very long time? No I don't, because they have that most spectacular product. The market will take a break but Dubai is certainly there for the long haul. It's not going anywhere any time soon." Unlike the salmon and lobster.
Half an hour after the Platinum Two launch, everything is disappearing fast, and the ACW sales staff certainly seem happy.
"Take a look around," said a member of the PR team.
"There are people buying entire floors at once."
Investors will be hoping that the predictions of Eric Trump ring true, and that the buildings they are buying into will be packed with visitors for many years.
Meanwhile, Dubai continues to grow at an astounding rate. The only risk in erecting a city as quickly as conditions allow, is that fortunes can be lost and the world can change in an instant. The built environment, unfortunately, cannot.