My Space: Lessons from Dubai

Amyrta Sen, the Nobel Prize winner for economics, was asked in an interview during the celebration of a city-state's independence day his view of city states. His comments were an insight into his thinking.

History, he said, has shown that city states have a relatively short lifespan; they grow, they innovate and then they have a golden period, and then they pale into insignificance. He cited examples such as Rome, Athens and Constantinople. They usually, he said, do not have a life expectancy of more than a 100 years.

While Amyrta Sen’s history lesson may not be correct in the modern context of the world which has major communications, the lessons from Dubai are relevant for any city with similar ambitions of being a world-class city. Dubai’s lack of oil (only 6% of its revenue is based on oil) decided that in the early 1990s it was going to become a financial centre for the Middle East, and so the ruling family led by Prince Maktoum of the Al Maktoum Dynasty (which has been part of Dubai since 1833) decided that it was going to increase revenue from free trade, tourism and other service-oriented businesses. By 1993, Dubai had attracted worldwide recognition through its innovative real estate projects, sports events, and its emergence as a world business hub.

Other places like Abu Dhabi, Bahrain and Kuwait in the gulf region also had similar ambitions, but Dubai was quicker and proceeded to spend large sums of money on inviting the best designers, architects, engineers and workers from all over the world to build creatively designed high-rise buildings that would showcase the city as an innovative new city for commerce and industry. The Jebel Ali Free Trade Zone became the busiest container port in the world for many years as everything in Dubai had to be imported. The desert was converted from a barren sandy expanse into a new city and become a veritable metropolis. Now it boasts the tallest building in the world.

The financial meltdown in 2008 saw the city being relabelled as a highly leveraged real estate development playground, where international construction and building supply companies relied on the implied sovereign guarantee in dealing with the Maktoumlinked companies, though it was vigorously denied in the aftermath of the financial meltdown.

Dubai wanted to build buildings of high standard, with full infrastructure and facilities to make sure they could attract the world’s leading financial organizations to move their business to the Middle East due to its pre-eminence within the largest oil deposits in the world. Since the other states in the Middle East had very strict real estate rules of ownership, Dubai decided that it was going to open up ownership of real estate initially from 30-year leases to 60-year leases and then to 99-year leases to encourage more foreign direct investment into the city. But almost all the mega developments were done as joint ventures by the major Maktoum family-related companies and usually under the Dubai World umbrella. The government-linked companies had the ability to borrow billions of dollars for development and over a 10-year period, they were able to attract a large volume of people to move to Dubai. By 2008, the immigrant population versus the local population was almost 4:1.

In the fall of Dubai from its pre-eminence as a modern city, the textbook fundamentals of real estate began to show. By building high-rise buildings quickly with poor quality supervision which they thought could be fixed later, Dubai believed that it could set the tone for businesses that would attract people from all over the world to come and live and work there.

What all government regulators fail to understand is that a city’s real estate has to mean something other than just bricks and mortar.

The desire to make a city your own

While cities need space for occupation and infrastructure, it is not the hardware of highways, roads and designer high-rise buildings that determine long-term staying power, but the software that makes people want to live there as their home to progress it. Singapore is now beginning to grapple with that problem as well.

Interviews with immigrant professionals and workers in Dubai showed that not many wished to make Dubai their permanent home. The majority wished to make as much money as they could in the business of Dubai for as long as they could then move on to a much better (in their mind) location where they could enjoy the fruits of their enterprise in Dubai. This is in stark contrast to people who go to work in, say, the UK, the US, Australia or even India, China or Malaysia. In almost all these countries that attract immigrant workers, either for manual labour or as professionals, there is always an attraction to want to live there for the rest of their natural lives and raise their families there. This seemed to be missing in Dubai.

So Dubai, after finishing its hard infrastructure, will require tremendous effort to make people want to stay there. And the way the foreign media has reported on Dubai’s treatment of its immigrants in the aftermath of the current crisis has not won the city many converts.

Colour-blind regulations attract the best talent

To be an international gateway, a city needs rules and regulations that are easy to follow and blind to religion, race and colour. Almost every country in the world has access to the Internet and it is not difficult to find a relationship between the country’s rules and regulations in ownership of property, work ethics and meritocracy that becomes the deciding factor when anyone wishes to live there permanently. In other words, every country that attracts foreign direct investment or people to come and work there must always have at the back of their mind a desire to make them contribute long term to the economy of that country.

Many countries in the Middle East and Asia believe that all the talent is within their own people and that they have enough talent within their country to attract talent and FDI. Advanced countries do not believe that.

They believe that the best talent in the world has to be attracted to live in their countries and add to the national GDP by providing training and experience and funds to the local population so that the nation can go forward in leaps and bounds instead of in incremental organic steps. Stringent immigrant rules after 9/11 in the US stopped talented postgraduate students going to the US. This has alarmed businesses as many IT advances in the US were invented and created by Asians in American incubators. So now American universities are opening postgraduate campuses in Asia to tap their talents for the US. That’s the quick response to a threat to their superior position.

Red carpet or red tape: How to attract FDI into real estate

The third reason to invest in a new country are simple guidelines that are required for sustained real estate development. It is not enough to give 99-year leases and yet have rules that say foreigners have fewer rights than locals. You cannot promise a red carpet and then flood the investor with red tape. Countries that have the highest real estate values in the world have very simple rules on ownership. This month, Forbes magazine carried an advertisement for a sale of a luxury property in a neighbouring country. The clincher was two lines at the bottom. It read “No restriction on foreign ownership. No inheritance tax. No capital gains tax. No currency controls. No withholding tax for sale of properties. No value added. I wonder who they were comparing with?

Local council rules!

The last criterion is that all talent require soft services. Soft services are services that welcome foreigners to live in a city. Most foreign talent are not worried about government awards going to favoured parties or large contracts being given to friends of the ruling dynasty. What really concerns them are the petty obstacles that result in 120 days to register a company or impediments in setting up offices and obtaining telephones, power and water services, or difficulty in getting work permits for their spouses to work or children to go to normal schools. Petty issues such as these are what determine the attractiveness of the city, and more and more international cities in Asia that want to attract the best talent from around the world are using best practices to reduce petty bureaucracy. Hong Kong and Singapore are great examples of doing this and recently, Beijing has raised the bar for businesses. Kudos also to Taiwan and South Korea. Indonesia has gone from strength to strength and will overtake others in Southeast Asia over the next few years in its transparency for businesses in Jakarta.

So in the final analysis, Dubai was a very large roulette wheel where property bets were funded by debt and when the debt could not be recycled, everyone left, the music stopped and the wheel stopped turning. The Burj Khalifa, the tallest building in the world, is finished but not filled. The ROI may take years but as a tourist magnet, it is unbeatable. Malaysia too has used real estate infrastructure as a tool for keeping the economy going forward and our undervalued assets are testament to noble intentions without taking care of the soft issues. New mega projects in Malaysia will have the Dubai problem of low occupancy, low returns and high debt if we do not address the software necessary to make sure we do not fail.

The world’s perception of a country is shaped by the little things that affect everyday living and that is reported internationally, every day. Negative perceptions usually stay.

Kumar Tharmalingam is the chairman of Hall Chadwick Asia, a property advisory company that provides corporations with solutions on branding.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 789, Jan 18-24, 2010.