Doubting Dubai

Saif Ahmed began living the Dubai dream five years ago. Armed with an M.B.A. from the University of Toronto, the Canadian entrepreneur moved to the gulf city-state and co-founded property developer Universal Canlink Inc. By 2006 the firm had annual revenues of $15 million, luring foreign investors with tales of “meteoric” growth in the local property market. Lately, with the global financial downturn spreading to the Middle East, Ahmed has come back to earth. “Before, people were buying blindly, without asking much about the details,” he says. “Now such risk takers have disappeared.”

Among the signs of the changing mood: Nakheel, the developer of Dubai’s proposed 200-story skyscraper, has announced it is reassessing its needs. Boardrooms and coffee shops alike are buzzing with talk about the coming fall. The Cairo-based investment bank EFG-Hermes recently predicted that Dubai property values could tumble 20% in the next three years. Shares of Emaar, a Dubai company that has become one of the world’s biggest real estate developers, have fallen almost two-thirds since January.

Nobody is calling it a bust–not yet, anyway. Small to midsize builders like Ahmed are still operating, and 70,000 visitors attended Dubai’s Cityscape property show recently, where projects worth some $180 billion were announced. Yet Dubai is vulnerable. As the gulf’s business, transportation and tourism hub, it is more entwined with the global economy than many of its neighbors. And Dubai never enjoyed the profits from oil and natural gas that enabled sister emirate Abu Dhabi to amass a vast financial cushion.

But Dubai’s biggest risk is its reliance on debt to drive its breathtaking building boom. Moody’s has estimated that Dubai’s government and public-sector company debt was at least $47 billion, a staggering 103% of the emirate’s 2006 GDP. The rating agency said it expected debt to outpace GDP for an additional five years, making Dubai very exposed to financial and geopolitical risks.

Dubai officials insist that they can meet their debt obligations for the next two years. But the credit squeeze clearly compounds some growing challenges to Dubai’s revenue streams. The most obvious of these is the plummeting price of oil, from $147 to less than $65 per bbl. since July, rendering regional investors increasingly cautious as they dial down their expectations of untold wealth. And a global recession is likely to tighten the belts of the foreign investors and vacationers who have driven demand for Dubai’s real estate and tourism developments.

All is not gloom and doom, however. The United Arab Emirates, a federation that includes Dubai and six other states, has made $33 billion available to banks to calm the nerves of U.A.E. depositors and investors. And if the credit crunch shakes out property speculators and slows Dubai’s growth to a more sustainable level, it should have the added benefit of taming inflation. “I am not necessarily thinking we are in a crash scenario,” says EFG-Hermes managing director Hashem Montasser. “The economic situation is still very sound. [But] we will see a deceleration of prices, and it’s probably a good thing as long as it’s done in an orderly way and doesn’t turn into a panic. The market has gone to where it is too quickly.”

One reason for the relative lack of panic so far is that Dubai real estate remains a financial haven for wealthy individuals from less stable countries like Iran and Pakistan. What’s more, Dubai’s property sector is dominated by a handful of companies–collectively dubbed Dubai Inc.–that are directly or indirectly owned and controlled by the government. Some argue that Dubai’s authorities could thus avert a bubble burst by keeping finished projects off-line until conditions improve. Also, in the event of a systemic threat, Dubai can probably rely on superrich Abu Dhabi for a bailout.

Meanwhile, developers like Ahmed keep plugging away. He knows the easy sales may be over. “People are more educated and calculated,” says Ahmed. “Now they are asking for a more detailed sales pitch. They want to know about the developer’s track record.” That’s no bad thing. Prudence may be the key to preserving Dubai’s appeal in uncertain times.

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