Forty years earlier Dubai was a village on the edge of the Arabian Desert. Locals citizens lived in houses made out of mud shacks and the only vehicle for travel or moving was ‘The Ship of The Desert’.
After 40 years Dubai have created artificial islands full of luxury villas, the world’s tallest tower, an underwater hotel and many more things which might make tails spin of ones eyes. Dubai is now the glittering crown of the Middle East. The gulf state is now being known for its tall skyscrapers, wall-to-wall shopping centers and luxury hotels.
But the whole glittering castle is of the boom in real estate was constructed on sand. Sand made of credit/borrowed money. But the leash of bubble got broken when the financial crisis broke off sending the prices of real estate to rock bottom levels.
• Now prices in the real estate sector crashed where prices have fallen by up to 60%.
• 400 construction projects worth more than $300 billion have been shut down or postponed. The project cancellation reveals demand have dried up and future outlook is also very bleak.
• Even after the world economy tried to come out of the dark woods of recession the Dubai real estate sector struggles to survive. They are finding hard to find buyers even after prices came down by 60%.
• Moreover the cost of living in Dubai has gone up like any thing.
• All these will add the unemployment in Dubai. Most of the Asians are placed their and they might come back as Dubai have less to offer now and cost of living have goes up.
• Foreigners have refused to buy the projects which have resulted further trap for inventory creation. This has resulted to default of payments of debt.
The fear in Western markets is that banks risk losing billions, which will damage their lending process and recovery of the economy too. Dubai World has a net exposure of debt of $59 billion of liabilities as of August. Where as the total debt of Dubai is $80 billion. So the Dubai World holds debt of 73.75% of Dubai’s total debt. The Dubai Government announced that it is restructuring Dubai World, an investment company owned by the government, with immediate effect. It has asked creditors for a six-month standstill on its obligations until at least 30 May 2010. Nakheel, a real estate subsidiary of Dubai World, has a convertible bond due next months.
The most of the fear of UK and US is that Dubai might go for sell of assets which they are holding in UK and US. If this breaks out then one might find cascading fall in the world equities.
The fall in the share prices of banks eroded £14 billion from the UK alone. As per Credit Suisse European banks could have an exposure of €40 billion (£36 billion) as loans to Dubai. Banks including HSBC and Royal Bank of Scotland have helped to finance Dubai’s acquisitions and are now on the hook if the state cannot repay its debts.
When we dig into the past to find out the type of investments growth made in Dubai we find some astonishing facts.
• US-headquartered private equity firms like The Carlyle Group active in the Middle East, UK firm were historically more active at entrepreneurial investments and acquisitions in the Middle East.
• A sample of such transactions was the acquisition of Middle East news portal AME Info by Emap, a UK Media group.
• Acquisition of Dubai-based recruitment firm IQ Selection by UK-based Imprint Group was another sample of such UK edge over US firms.
• Firms like Goldman Sachs, Morgan Stanley and Lehman Brothers are already based in the Middle East and expanding. Ironically, this is happening at the same time that Middle East sovereign wealth funds are making high-profile investments in the US.
• US Treasury Secretary, Henry Paulson, have even visited the Middle East and assured investors in Abu Dhabi that the United States will remain open to sovereign wealth funds.
• Moreover Gulf governments hold more than US$400 billion worth of US investments, making them second only to China as America’s biggest creditor.
• Dubai-based Nakheel Group entered into a 10 bln usd deal with India”s DLF Ltd for residential projects in Tier I and II cities in 2007 which was followed by three financial institutions — Khaleej Finance and Investment (KFI) from Bahrain, Kuwait Investment Company (KIC) and Kuwait Finance House (KFH) — from the Middle East promoting a 200 mln usd fund for investing in India.
So the investment process of Dubai along with US and UK is very much convoluted. They are all well entangled in terms of investments. The burst of the boom might have a huge affect beyond our vision. The most affected will be the emerging economies in coming days if Dubai is unable to find a way out that might drag the world economy back to recession. Moreover developing economies will hesitate to do investment in emerging economies in the coming days. This failure will increase the risk of doing investments as well as will shaken the confidence of doing investments in emerging economies.
Who ever says that emerging economies will not get affected should understand that before any fresh investments the lack of confidence will play the game. Its true that there is ample amount of liquidity which is dragging the world market to roller coaster ride but this time their might be no one as in case of a double dip.
Indranil Sen Gupta, Research Analyst