Dubai’s sand castles crumble amid credit crunch

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There was always something surreal about Dubai’s fantastic development plans. Skyscrapers were rising in the desert faster than anybody imagined was possible. While some wondered about such rapid growth, others marveled at the plucky Dubaians’ go-get attitude. Nothing was considered out of reach; the sky was the limit, literally–the tallest building in the world, the most expensive hotel suites with helicopter landing pads, manmade islands, huge shopping malls, indoor sky slopes and ice skating rinks in the desert–all meant to attract foreigners and their investments. And they came, by the hundreds of thousands. Dubai was nicknamed, “Do Buy”!

Over the last several years, property values hit the roof. People put down payment on properties that would not be built for a year or more but would flip them in a few months making a tidy profit. It was not unusual for some properties to double in value in six months. Overall, real-estate values surged fourfold over the past five years, fueled by a supply shortage and an influx of expatriates. Rising commodities prices also drove inflation, accelerating to a record 11.1 percent in the United Arab Emirates (UAE) in 2007. The UAE is made up of seven tiny sheikhdoms, Dubai is the second largest of the seven statelets after Abu Dhabi. Dubai opened its property market to foreign investment in 2002.

Where on earth could people get such fantastic return on their investments? Spurred by such phenomenal growth rate, people speculated lavishly putting down payments for 10, 20 or even 50 properties at the same time. Borrowers tapped mortgages for as much as 90 percent of a property’s value to buy homes on the manmade fronds of the Palm Jumeirah and villas with gardens or golf course views in developments such as Emirates Hills, The Springs and The Lakes. Many became multimillionaires overnight in this made-for-speculators market until the financial crunch that started with the bursting of the US housing and mortgage bubble hit the rest of the world. Tiny Dubai could not remain immune from the ill effects of such financial downturns.

The property bubble in Dubai has burst as credit has become scarce and international investors have scrambled to dump their assets to minimize losses. That may shatter Dubai’s goal of creating a sustainable economy by building the Persian Gulf hub for finance and tourism, forcing it to depend on oil-rich neighbor Abu Dhabi for financing. The rulers of Dubai had speculated that the price of oil would perhaps continue its upward surge–it had reached $147/barrel before its precipitous fall to $40/barrel or less in recent days. With Dubai’s reserves at a paltry 4 billion barrels compared to Abu Dhabi’s 92 billion, Dubai is more vulnerable to such price fluctuations.

Banks have tightened lending or frozen it altogether. Amlak Finance PJSC, one of the biggest mortgage lenders in the UAE, announced on November 19 that it had suspended new home loans. London-based Lloyds TSB Group Plc stopped offering mortgages for apartments in Dubai on November 11 and reduced the amount it will lend for villas from 80 percent to 50 percent of the price. This has naturally had a negative effect on property values. For instance, in November, the cost of a seven-bedroom villa on Palm Jumeirah dropped to 19 million dirhams ($5.2 million), still an exorbitant price, down from 30 million dirhams in September, according to the Dubai unit of German real estate company Engel & Voelkers AG.

On November 20, Nakheel PJSC, Dubai’s state-owned developer of three palm-shaped islands in the Persian Gulf, and its South African partner threw a $20 million party for the opening of the $1.5 billion Atlantis resort, complete with the world’s biggest fireworks display and celebrities from actress Charlize Theron to singer Kylie Minogue. The hotel’s most expensive suite costs $42,000 a night excluding breakfast. Ten days later, however, Nakheel announced it was scaling back or delaying work on some of its $30 billion in projects, including the 62-story Trump International Hotel & Tower near the Mega Yacht Club on the trunk of Palm Jumeirah.

There is fear the worst is yet to come as a glut of properties arrives on the market. About 70,000 units are scheduled for completion in 2009, more than half were originally planned for 2008 or even earlier, according to a September report from EFG-Hermes. Buyers willing to commit to purchases before construction are harder to find now. Before the credit crunch, speculators accounted for 50 percent of the market.

“Dubai is more precarious than it has ever been,” said Christopher Davidson, professor of Middle Eastern Affairs at Durham University in the UK and author of Dubai: The Vulnerability of Success (2008, Columbia University Press). “If the property industry collapses in Dubai, it will be finished. Dubai’s relative autonomy will come to an abrupt end.” Dubai’s push into luxury property developments and tourist attractions was diversification on “paper sand,” said Davidson. Dubai has borrowed $80 billion to finance its transformation and make up for lack of natural resources like its richer cousin Abu Dhabi. The latter is not so badly affected because of the oil revenues it has accumulated. Even US President George Bush has called upon Abu Dhabi for a $70 billion handout, in addition of asking for $120 billion from Saudi Arabia, $60 billion from tiny Qatar and $40 billion from Kuwait. The Arab sheikhdoms and kingdoms will not be able to say no to Uncle Sam.

Dubai built its property empire on the backs of expatriate workers from Pakistan, India and Sri Lanka and maids from Indonesia and the Philippines that frequently suffered abuse. Such workers are paid pittance and kept in miserably overcrowded localities, often lacking basic amenities. Workers have been denied the right to bring their families and have few rights. Regardless of how long they live in the UAE, they cannot become citizens. The same is true of Saudi Arabia. The expatriate community is far more numerous than the local emiratis but because they are not granted citizenship, the expatriates remain vulnerable. With downturn in the property market, these workers will now be the first to lose their livelihood on which they depend so desperately and send to their families back home.

There is also another side to Dubai’s booming market. Most large hotels are little more than dens of prostitution. Hotels are permitted to issue guest permits to bring people from outside. In order to attract customers, many hotels bring girls from Central Asia, Russia, Romania and Western Europe. These girls are provided free accommodation in the hotel for three months while they are expected to service hotel guests. Each hotel has a club where girls enter for free while men must pay 100 dirhams. Alcohol is available and consumed in large quantities. Customers come to these clubs to pick up foreign girls. It has been pointed out to the authorities in Dubai that they are sitting on a time bomb. Girls with such loose moral character are likely to be infected with the AIDS virus. There are already reports of AIDS spreading among the local population because of the behavior of emirati men who then infect their wives.

Whether Dubai will achieve its dream of becoming the hub of property and tourist attraction is debatable. What is becoming certain is that it is leading the way in becoming the AIDS capital of the Middle East.

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