Humbled Dubai looks to real economy, Arab world

DUBAI: Nearly two years after it was forced to go cap in hand to neighbour Abu Dhabi for a bailout, a chastened Dubai has ringfenced vulnerable assets, forced banks to bolster reserves and deferred debt maturities.

A more modest approach to business — in contrast with the excesses of its earlier model — coupled with strengths in logistics and trade, and a growing focus on its own region, mean that Dubai's dreams of being a top financial centre are still just about alive.

Luck certainly seems to be in its favour: the Gulf emirate has proven an oasis of calm amid the chaos of the Arab Spring, which saw rebellion in countries as far apart as Tunisia and Syria and, crucially, rival Bahrain.

"In Dubai 2.0, we're likely to see what we didn't see earlier — more Arab traffic and more Arab business," said Florence Eid, CEO at research firm Arabia Monitor.

"There's going to be more regionalisation of the region. They used to send petrodollars to the US and Europe and some people used to go to Asia. Now we're seeing Arabs investing in other Arab countries — Dubai epitomises all of that, even more than ever now, as a locus for this activity."

Dubai's boom — and bust — were closely linked to its real estate market. The market is still plagued by oversupply, but there's a sense that when a recovery eventually happens, it will be based on firmer ground.

"The speculation has disappeared — it's a purely organic story and demand is still weak compared to when there was an influx of expats," said BoA Merrill Lynch economist Jean-Michel Saliba, who estimates that 20% of residential property, and 40% of commercial property, remains vacant.

He expects the property market to return to normal by 2015 because "the history of real estate bubbles suggests a five- to seven-year cycle".

Although only 12% of citizens in the United Arab Emirates are eligible to vote, Dubai has seen none of the violence that has roiled the region, thanks to high per capita incomes and subsidies. Its hotel, retail and residential real estate sectors are enjoying a boost from the emirate's status as a sanctuary from unrest.

"Interest from those displaced by the Arab Spring or looking for safe-haven residential properties in Dubai is reported to be particularly strong for upmarket villas in iconic projects such as Palm Jumeirah," said consultancy Jones Lang LaSalle (JLL).

Anecdotal evidence suggests that rich and even middle class Arabs are buying Dubai property to hedge their risks in other countries.

"We're seeing some clients from Yemen, Syria, Egypt and Libya," said a Dubai-based real estate agent. "They have no liquidity in their home markets and are moving money from one place to another."

A JLL report found sale prices for the high-end villa segment were trending upward, and rentals in this segment were starting to increase in some areas, even though apartment rents were continuing to fall.

Dubai's malls are teeming with visitors from the region. In particular, there is a weekend spike in Saudi visitors, who earlier probably used to make the much shorter drive to Bahrain.

A Western expatriate was forced to vacate a five-bedroom penthouse on the Palm Jumeirah early this year because his Saudi landlord wanted to relocate the family to Dubai.

A salesman selling rare pashmina shawls in Souk al Bahar, which adjoins Burj Khalifa — the world's tallest building — said it was mainly Saudi and Kuwaiti customers who were buying the most expensive scarves, which can cost more than 6,000 dirhams (RM5,198.08).

Western banks operating in Dubai are alive to the opportunities that Arab millionaires present, shifting their focus back to wealth management at the cost of research and investment banking.

UBS and Deutsche Bank have recently hired new regional heads for wealth management. Deutsche is expecting to add more private bankers before year-end, a person familiar with its plans said.

The new Dubai is a quieter version of the over-the-top desert metropolis that attracted Western bankers in droves in the last decade, only to fall apart spectacularly when real estate prices dived and top firms were unable to meet debt commitments.

Some of the signs are promising, even though economic problems in Europe and the United States could yet cast long shadows.

Passenger traffic at Dubai International Airport rose 9.7% to a monthly record of 4.7 million people in July, while year-to-date traffic jumped 9%.

Hotel occupancy stood at 86% in the first quarter of 2011 compared with 75% in the third quarter of 2008, when the global financial crisis deepened. The loan-to-deposit ratio at banks fell to 94% in July 2011 from 110% in January 2009, according to Bank of America-Merrill Lynch.

Analysts estimate unrest-hit Bahrain suffered US$20 billion (RM63.64 billion) in capital outflows in the first quarter of this year, and some of that money headed to Dubai.

Dubai's debt insurance costs have narrowed since Dubai World reached a deal with creditors last year, and they hit pre-crisis levels in June this year. The government launched a US$500 million bond this year, its second since the debt crisis.

Flagship airline Emirates' US$1 billion bond issue in June was oversubscribed six times, and has been resilient even in markets spooked by the eurozone sovereign debt crisis and the spectre of a US sovereign credit rating downgrade.

The carrier's massive expansion plans and wide reach are the envy of others in what is a struggling sector globally.

"A lot has changed, including the way Dubai Inc is structured, the bankruptcy law, greater provisioning at the banks and harmonisation of bad debt rules. And there's a realisation that you need a cash rationale for expanding real estate — that if you build, sometimes they won't come," said Daniel Broby, chief investment officer at Silk Invest.

Developer Nakheel, builder of artificial islands in the shape of palm trees and the world map, has been brought under direct government control, and further changes to top management at other companies are expected.

"The good cashflow earners have been ringfenced sufficiently to drive Dubai 2.0," said Broby.

The emirate's sovereign wealth fund, Investment Corporation of Dubai, repaid in full and on time a US$4 billion loan due in August after having secured commitments to part-refinance it.

"If more restructuring is to come, there is a precedent. There's comfort that there's a kind of rulebook we can use," said Georges Elhedery, HSBC's head of global markets for the Middle East and North Africa.

Big redemptions of government-related debt coming up will be a challenge. The International Monetary Fund estimates nearly US$30 billion in repayments will be due before the end of 2012. Completed and ongoing restructuring negotiations are merely pushing back full repayments by between four and eight years.

Good economic growth would help. Dubai's economy expanded by 2.8% in real terms last year, faster than previously expected, as growth in trade and the retail sector helped it recover from its contraction in 2009, according to preliminary data. Some analysts expect growth of around 4% next year.

The economy in Abu Dhabi, now seen by investors as a backstop for Dubai, has been underpinned by a strong oil price. — Reuters