Dubai's new boom assumes short memories
Dubai, February 18, 2013
By Una Galani
Dubai has rediscovered its appetite for grand designs. A replica Taj Mahal four times bigger than the original, the world's biggest Ferris wheel, several new mega-malls, and over 100 new hotels are amongst a raft of extravagant projects aiming to boost tourism in the emirate.
But lingering debt woes from its last boom-and-bust cycle should hopefully reduce the risk of runaway spending.
The strategy isn't quite a repeat of the one that led the emirate to the verge of bankruptcy in 2009, when Dubai was left hanging by a debt-fuelled real estate bubble and a series of high-profile overseas acquisitions at aggressive valuations. The economic fundamentals have improved.
While residential and commercial real-estate prices remain well below their peak, there is room for new investment in retail and tourism. Hotel occupancy rates were at 90 percent last year, says Ernst and Young. Shopping malls in central areas are packed. New Bollywood theme parks and an expansion of giant Chinese malls will support the emirate's push to woo more visitors from Asia and further align its economy to fast growth markets to the East.
Dubai is drawing on its relative strength in infrastructure and as a regional safe-haven. The city-state currently enjoys almost 10 million foreign visitors in a year, five times its population. Tourist numbers could grow substantially if Dubai can convince a larger chunk of the 58 million passengers that landed in Dubai International last year to turn their transit into a short break.
Yet Dubai has said little about how it will fund its bold endeavours. That's a sensitive issue. Lenders to flagship conglomerate Dubai World and property developer Nakheel have been promised 100 percent repayment of their loans but have to wait until at least 2015 to get any money back as part of a multi-billion restructuring plan contingent on asset sales which are yet to materialise.
Dubai as a sovereign only raised $1.25 billion in public debt markets last year. The island project featuring the giant Ferris wheel will alone cost $1.6 billion. Local banks are already overexposed to government-related entities. It is also unclear how readily foreign ones will lend directly to firms like Meraas Holding, owned directly by the ruler of Dubai and dubbed by analysts as "the new Nakheel" because of the multiple mandates it has won. Royal ownership, after all, provided little protection to those that loaned billions to Dubai Holding.
The region can ill afford another boom and bust. Unless memories are short, lender restraint may help prevent that this time round.
Dubai announced plans on February 13 for a new $1.6 billion island project featuring the world's largest Ferris wheel at its centre. Dubai's ruler approved the 6 billion dirham Bluewaters Island development, which includes a 210 metre (688 foot) high Ferris wheel, the Dubai Eye. The wheel will cost one billion dirhams.
State-owned Meraas Holding will develop the Bluewaters project, which will begin construction in April, state news agency Wam said. South Korea's Hyundai Contracting and Starneth Engineering have been appointed primary contractors for the design and construction of Dubai Eye.
In November, Meraas was chosen to develop a 10 billion dirham complex of five theme parks, including one focused on India's Bollywood cinema industry, as Dubai bids to boost its tourism sector.
In the same month, Dubai announced plans for a huge new tourism and retail development on the outskirts of the downtown area named "Mohammed Bin Rashid City" with a park 30 percent bigger than Hyde Park in London. The development will include a retail complex named "Mall of the World" that will be able to host 80 million visitors a year and will include over 100 hotels. - Reuters Breakingviews
(The author of this article is a Reuters Breakingviews columnist. The opinions expressed are her own)