Saturday, December 5, 2009

Dubai Debt Debacle Validation of "Skyscraper Index

In light of the current concern over Dubai’s debt, the inevitable questions are beginning. Might the market have seen this coming?

Sure, looking back on it, it seems like there were probably some red flags.

For example, that indoor ski slope, in hindsight, looks a bit, shall we say, frothy. And yes, a particularly prescient observer might have cited the creation of that string of palm-shaped islands off Dubai’s coast, as a manifestation of irrational exuberance.

But if you were looking for a reason to get worried about Dubai over the past few years, you needed only look at the Burj Dubai — the world’s tallest skyscraper — according to the “skyscraper index.”

Credited to a 1999 report penned by Andrew Lawrence, then an analyst at Dresdner Kleinwort, the skyscraper index argues that there is a correlation between the construction of the world’s tallest buildings and the impending end of business cycles.

Back in 2006, BNY Mellon’s Chris Sheldon, director of investment strategy, applied the skyscraper indicator to Dubai:

Groundbreakings for the worlds tallest buildings typically have taken place after a long period of sustained economic growth. Optimism is high, credit is easy to obtain, and the sky is the limit. A new worlds tallest building also has proven to be a predictor of a booms end. Returning to Dubai, the Burj Dubai, at 2,313 feet tall, will be 40% higher than the current record holder, Taipei 101, which was completed in 2004.

A story in the Journal in August pegged the completed height of the Burj Dubai, or Dubai Tower, at 2,684 feet. Interestingly, another Dubai skyscraper, called the Nakheel Tower, was supposed to be even taller than the Burj Dubai. But construction was suspended back in January, as the company worked to adjust the plans “‘to better reflect the current market trends and match supply with demand.”

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