‘Keep Going. The Sheikh Orders It’: Inside The Upside-Down World Of Developing In Dubai
DUBAI — Where the Arabian Desert meets the Persian Gulf, this city-state seemingly emerges from nothingness. Soaring, futuristic towers rise more than a half-mile into the sky, thumbing their nose at Western real estate logic.
Dubai stands in stark contrast to the U.S. in the aftermath of the Great Recession, where conservative underwriting and “cautious optimism” have dominated commercial real estate’s lexicon this decade.
The city-state’s ruling family has presided over a decades-long building boom, the outgrowth of a 60-year-old ambition to create the Middle East’s answer to New York, London, Tokyo and Hong Kong.
But the value of Dubai’s real estate is plummeting.
Developers are calling for a halt on new construction, and many in Dubai real estate circles whisper of overbuilding.
The supply is fueled by the demand of one man: Sheikh Mohammed Bin Rashid Al Maktoum, the ruler of the Emirate of Dubai and vice president of the United Arab Emirates.
“You’re told as developers to keep going,” one local developer told Bisnow last month at a chic hotel bar in Dubai’s Trade Centre district. “The sheikh orders it.”
The fears surrounding oversupply are only spoken under the cloak of anonymity. Bisnow spoke to eight developers, business leaders and others on the ground in Dubai last month, and none would go on the record out of fear of retribution from the government. Twenty other developers declined to comment entirely.
While the sheikh has relentlessly pushed Dubai’s developers to add hotels, apartments and office buildings to his emirate, this year, the cracks in the strategy have started to show.
In September, Dubai announced the formation of the Higher Committee for Real Estate Planning, the sheikh’s first indication that the laws of supply and demand still apply to his domain.
All the while, 80,000 residential units are expected to come online by next year — and developers and architects are still salivating over projects that would be nonstarters anywhere but here.
“Dubai’s image and DNA was ‘build, build, build’ and keep the momentum,” said Marwan Aboudib, a partner at Dubai city innovation incubator Tekuma. “Keep pushing and that is what would give investors FOMO, and it worked.”
The question moving forward is: Can it keep working?
Grand Ambitions And Air Conditioning
The Al Maktoum family has controlled Dubai since its tribe took over the peninsula in 1833. Since Sheikh Rashid bin Saeed Al Maktoum, Sheikh Mohammed’s father, ascended to power in 1958, Dubai has been built around the idea that it could one day be the business center of the world.
It took climate control to make that vision a reality. Until air conditioning became widely available in the 1950s, the city’s summer temperatures of over 120 degrees Fahrenheit made it nearly uninhabitable.
Cities the sheikh viewed as inspiration and competition, like London and New York City, had several centuries’ worth of a head start. What many call overbuilding, the Al Maktoum family considers making up for lost time.
Today, Dubai’s driverless metro system whooshes residents and visitors between master-planned neighborhoods. Walking around Dubai Marina, with its sporty yachts and luxury condo towers, feels more like South Florida than the Middle East, minus the skimpy swimsuits — Dubai is still an Islamic city-state, after all.
The 2,722-foot Burj Khalifa, the world’s tallest building, glitters at night with light shows choreographed to a mix of Whitney Houston and Arabian instrumental tracks.
During the day, the only thing punctuating the sounds of jackhammers and construction crews in Dubai is the sound of Muslim prayers broadcast across the city five times a day. Many of the emirate’s neighborhoods have been built in the last 20 years, and glitzy ads signal more are on the way.
Dubai’s skyline has the fourth-highest number of skyscrapers in the world, according to the Council on Tall Buildings and Urban Habitat. Along with being home to the world’s tallest building, Dubai has the world’s tallest hotel (the 1,165-foot JW Marriott Marquis) and seven of the world’s 10 tallest residential towers.
Sheikh Mohammed has taken after his father, and today encourages a litany of government-backed developers like Emaar — the firm behind the Burj Khalifa — to build new, sprawling neighborhoods across the region. He is pushing to build infrastructure well beyond the needs of a city of 3 million people.
“I always call it the Silicon Valley of real estate,” Aboudib said. “Think of Dubai as a startup. The purpose of these developers is to provide venture capital and supply so, one day, the city will become profitable on its own.”
Even forward-thinking leadership can’t ignore the flashing red lights of present day.
The city has added more than 21.5M SF of offices since 2012, and 8.5M SF of office is expected to come online in the next two years, according to Knight Frank. Office vacancy is up more than 5% over the last two years, while rents have fallen 9% over the last 12 months.
The current rate of residential development in Dubai — a 13% increase in supply by next year, bringing the city-state’s total to nearly 600,000 — is double what it actually needs, according to JLL.
Property values are down 27% from a 2014 peak, according to Middle Eastern consulting group ValuStrat. Dubai property experts don’t expect to see early signs of a recovery until at least 2022, according to a September Reuters poll.
“All sectors except residential which has reached the bottom, currently remain in the late downturn stage of their cycle, with further declines in rents and sale prices likely over the next 12 months,” JLL wrote in its third-quarter Dubai market report.
The real estate markets in other Middle Eastern cities aren’t performing any better. The office vacancy rate in Abu Dhabi, Dubai’s more conservative UAE sister city, rose to 27% in Q3. JLL pegs the city’s overall CRE market as somewhere between its point of fastest rental decline and bottoming out.
Saudi Arabia’s capital, Riyadh, where Crown Prince Mohammad bin Salman is putting significant investment in his effort to diversify his kingdom’s economy away from oil, has a similar problem of supply outstripping demand. Riyadh’s office rents were down 5% year-over-year in Q3, according to a Knight Frank market snapshot, and 2M SF of more offices are in the pipeline.
A little more than two years out from hosting the FIFA World Cup, Doha, Qatar, is in its own building boom before it shows itself off to global soccer fans. By the end of 2020, developers are slated to add nearly 4M SF of office to the city’s current 15M SF inventory, according to ValuStrat. The Class-A office sector already has a 30% availability rate, Cushman & Wakefield reports.
Dubai is also the most liberal major Arabian Peninsula market, allowing liquor consumption and women to wear more Western clothing. Its neighbors are accused of human rights abuse, like Qatar’s reported exploitation of hundreds of thousands of workers in the lead-up to the 2022 World Cup.
Despite receiving praise for his reformations like allowing women to drive, Saudi Arabia’s MBS has also led an “unprecedented government crackdown” on activists, Human Rights Watch reports, and his government infamously carried out the torture and killing of Washington Post journalist Jamal Khashoggi.
“It just doesn’t seem likely a legitimate regional competitor to Dubai will emerge in at least the next decade,” CBRE Middle East Managing Director Nicholas Maclean said.
That doesn’t mean Dubai’s real estate market is on solid footing.
DAMAC Properties Chairman Hussain Sajwani, one of Dubai’s largest developers, in October accused rival developer Emaar of dumping too much supply in the market and called for as much as a two-year moratorium on residential construction. Sajwani continues to stress the market is heading for trouble if rampant building continues.
“The glut of supply we have, or we are going to have, will have an impact on the market,” Sajwani said last Wednesday at a CNBC panel in Abu Dhabi. “It’s the greediness of developers.”
The sheikh appears to be listening.
Sixty-one years after Sheikh Rashid began his modernization push, his son is feeling the first pushback.
“Real estate projects need to control their pace to bring added value to the national economy so as not to become a burden and a source of imbalance in our economic process,” Sheikh Mohammed wrote in an Aug. 31 letter to Emiratis.
Shortly after, the sheikh formed a committee on real estate planning to keep supply and demand in check.
The Higher Committee for Real Estate Planning is headed by the sheikh’s son, Maktoum bin Mohammed Al Maktoum, and filled out by leaders from government- or semi-government-owned firms like Nakheel and Emaar.
“The new committee aims to ensure proper coordination between developers to produce the optimal level of real estate supply to maintain market attractiveness,” a Dubai Economic Office spokesperson said in a statement.
The sheikh’s committee on overbuilding has met once since its formation with a second meeting planned for later this month. But, while in its infancy, developers Bisnow spoke with have a hard time envisioning the group putting a lid on the industry that has created the city’s identity.
“Construction itself is a major contributor of GDP,” Maclean said. “It’s hard to just turn that off.”
Even though DAMAC’s Sajwani told Bloomberg News there should be as much as a two-year halt on development, his company, which is not a member of the committee, expects to deliver 4,000 residential units this year and an additional 6,000 by the end of 2020.
Emaar, Dubai’s biggest developer, has delivered 4,700 residential units this year and launched 19 developments so far in 2019, the company said in a November earnings announcement.
The bigger question in Dubai real estate circles is why the committee on supply and demand was formed in the first place. The government owns 30% of Emaar, took complete ownership of Nakheel after the recession, and has a stake in the nine other development firms rounding out the committee’s membership roster.
Several people Bisnow spoke with said the government typically has between a 25% and 100% ownership stake in development companies it is directly involved with. Every analyst and local developer Bisnow spoke to said almost nothing gets built in Dubai without the sheikh’s blessing, so it is difficult to understand the committee’s purpose.
“It’s interesting [that] an external form of control has to be put in place when strings are already in place to enforce these companies in ways the public doesn’t need to know about,” said one developer who works closely with Nakheel.
Abandoned Ferraris And Broken Dreams
Dubai’s oil supply is puny by Middle Eastern standards. While the UAE claims to have the world’s sixth-largest crude oil reserves, Abu Dhabi has 92 billion barrels compared to Dubai’s 4 billion. Sheikh Rashid used Dubai’s oil money to invest in infrastructure and development to foster trade, commerce and tourism.
But the city-state’s reliance on global markets left it vulnerable.
Nearly $600B in construction projects were either canceled or put on hold when global markets tanked in 2008. Property values at an apartment development at Nakheel’s Palm Jumeirah project dropped by 75%. Rents at Burj Khalifa fell 40%.
Landmark projects suffered, but the government was also blaming the rush of international investors for its tanked real estate market.
Developers, largely from Europe and Asia, marketed projects on land they didn't fully own, buying property with money from residential pre-sales. They then financed construction as more buyers opted in, said Aboudib, who is looking to develop smaller residential projects in Dubai.
The city swelled with expatriates looking to make quick profits off the city’s hot property market. Today, only about 8% of Dubai’s population is native Emirati, and expats make up the rest.
Despite Dubai’s embrace of Western culture, Sharia law still governed the city-state’s finances.
The UAE usually takes away work visas from expats who lose their job and gives them 30 days to leave. For the development community, defaulting on a loan was punishable with jail time. That often meant the only way to handle a failed Dubai project was to book a one-way ticket out and never return.
“There are so many development dinosaurs still lurking around the city from the last crash,” Aboudib said. “People filed [for] bankruptcy and were chased out of town. You’d see Ferraris simply abandoned at the airport.”
Even state-backed developers were close to defaulting on loans during the crisis. Abu Dhabi’s government eventually stepped in and gave Dubai a $20B bailout, which enabled several of the city’s large-scale, state-backed projects to continue.
As payback, the skyscraper project originally known as Burj Dubai was renamed Burj Khalifa, in honor of the president of the UAE who signed off on the bailout.
Ten years later, construction is once again booming. Dubai’s $611B construction pipeline is nearly double that of London’s, a city five times its size.
“There’s a lot of speculation as to why developers, particularly the state-controlled developers, continue to deliver,” Maclean said.
Along with the continued push to build for the future, analysts say the supply glut is a way to lure more residents into the city.
More than a million people drive into Dubai each day from neighboring emirates, according to the Dubai Statistics Centre. Higher rent in Dubai makes more affordable emirates like Sharjah, a 25-minute drive from downtown Dubai, increasingly attractive.
A one-bedroom Sharjah apartment rents for about $450 less a month than one in Dubai, according to UAE real estate site My Bayut.
“The government is aware the cost of living in Dubai is a primary complaint of the people and the expat community who now lives here, and that’s an important community,” Maclean said.
Building more supply might make Dubai more competitive with its neighbor to the east, but there is also a risk of going too far, Aboudib said.
“If you make it easier to make people from Sharjah to move to Dubai, that fills up your supply,” he said. “But Dubai has built its reputation on luxury and wealth. There is this idea that if Dubai gets a reputation as a cheap destination, money will go elsewhere.”
'When The Real Problems Happen'
Dubai emerged from the rubble of the recession, and the money has returned, fulfilling the dream Sheikh Rashid set in motion when air conditioning arrived.
Technology companies like Microsoft, Google and Apple all operate their Middle East headquarters in Dubai. Brookfield Asset Management made its first investment in the emirate this year, partnering on a $1.4B retail joint venture with Dubai’s Meeras Holdings.
Emirates, the state-owned airline, has turned Dubai International Airport into the world’s busiest in terms of international traffic, according to Airports Council International. Plans for the city’s Dubai World Central airport call for a facility capable of handling 160 million passengers, or about 50 million more than the world’s current busiest airport — Atlanta’s Hartsfield-Jackson International Airport — expects in 2019.
But while the growth over the last decade has been widely considered a success to this point, it is slowing down. Dubai’s economy grew by less than 2% in 2018, down from highs around 5% in 2013 and the slowest seen since before the last crash.
But developers don’t expect history to repeat itself.
The government has much more control of individual firms. The new committee on overbuilding is a sign that the sheikh at least acknowledges a supply and demand imbalance, even if it still isn’t clear what changes, if any, the group will enact.
“The Higher Committee for Real Estate Planning will help streamline supply of all real estate types, from a government perspective,” the Dubai government spokesperson said. “The Dubai real estate market is a free market and key players have made investments according to business projections. As [a] government, we advise businesses to take informed decisions based on supply and demand factors and market conditions.”
Despite the recognition of supply and demand, the government is also underway with its next master-planned community.
Construction crews work around the clock at a 1,083-acre site near Dubai’s southern border with Abu Dhabi to make sure Expo 2020, a modern world’s fair, propels the city’s image forward.
The six-month event draws delegations from countries around the world to set up opulent pavilions to showcase their culture, industry and economic growth engines. More than 80% of the complex is slated for alternative uses once the Expo finishes, according to the Expo’s vice president of legacy.
Emirati leadership plans to leverage the 173-day event as free advertising that Dubai is more than a luxury playground. It is also the ideal place for global investors to park capital and expand business.
While the city may now be home to several of the world’s “tallest” this or “biggest” that, its leader is now after the most towering business prize of all: legitimacy.
Developers are confident that, as other Middle Eastern countries are dealing with volatile domestic issues, companies wanting to be in the region have no other option but to see Dubai as the only legitimate place to do business.
“Seriously, where else are they going to go? Saudi Arabia? Lebanon?” one developer said while touring his Palm Jumeirah construction site last month. “Good luck.”
Brookfield didn’t respond to Bisnow’s request for comment, and other sources are hesitant to say the firm’s arrival is a sign more Western companies will pour into the emirate. But Dubai will likely continue to build as if they will.
“The city has to always be buzzing,” Aboudib said. “Dubai built its reputation on all these superlatives, so you don’t want to create panic. The second you create panic, everyone will start pulling their money, and that’s when the real problems happen.”