Dubai's Economic Crisis A Cautionary Tale Comes True

As the United Arab Emirates celebrates its 38-year Anniversary of Independence from Britain this week, a dark cloud of uncertainty casts a shadow of fear over the festivities. The source of the fog: the November 25, 2009 event known as "the Dubai World Debacle."

In short: Dubai's largest government owned conglomerate requested a six-month "hold" on payments in order to restructure its estimated $60-$80 billion of liabilities. In the words of one news source: "Dubai, once the poster child of the economic boom... is now the epitome of recessionary bust.... The recent events are a wake-up call" that Dubai's property growth, its man-made islands shaped as palm trees and Arabic poems, its soaring infrastructure -- ALL of it was built "on the sand of debt." (Associated Press)

And, it's sinking faster by the day. Dubai's main stock market stands 60% below its 2006 peak, while the pillar of the region's economic growth -- property -- is crumbling under a wave of defaults and fear. On this, the following statistics say plenty:

• Real estate prices have plunged 50% so far in 2009, with expectations for further declines of 20-30% by the year's end.
• At the end of the third-quarter '09, office space prices plunged 58% from year ago levels.
• Office occupancy rates in recently finished buildings stands at 41%.
• And, an estimated 400 real estate projects, valued at $300 billion, have been frozen due to ongoing debt insecurities.

Fact is, when the world's tallest skyscraper, the famed Burj Dubai opens its doors on January 4, it will do so amidst the worst real estate slump in Dubai's history, record low occupancy levels, abandoned construction sites, and unstable market conditions.

For many, the shock has only just set in. As one November 28 Reuters observes: With the "Dubai World bombshell" and series of unfortunate economic events in Dubai, the "Black Swan has come waddling out of the desert."

The definition of "black swan" is a rare and unexpected event.

In truth, Dubai's financial woes are neither rare nor unexpected.

( First Comes Dubai, And then Comes... Stay one step ahead of the major turns in the world's leading economies. Subscribe, absolutely risk-free, to the Financial Forecast Servicetoday.)

Fact is, the warning signs of trouble emerged in Dubai long before the current wave of "sovereign default problems." How long ago did they first appear? 2008? 2007? Try 2006, at the height of the mainstream's infatuation with this economic marvel of the Middle East, this "Jewel of Arabia" where the altitude of economic ambition had reached unprecedented heights -- literally.

Here, the April 2006 Elliott Wave Financial Forecast presented a special report on the Arab state titled "A Bull Market Goodbye From Dubai." In it, our analysts revealed why the half-mile-high construction of Burj Dubai sent a towering "sell signal" for the regions markets and wrote:

"How big is this peak? The closest precedent is what happened in the late 1920s in the United States. The Jazz Age was in full swing and American's experienced an unprecedented level of prosperity with no apparent end in sight. Three landmark buildings were erected on the New York skyline: the Chrysler Building, the Empire State, and the Manhattan Company. All three buildings were conceived in the bull market and built through the peak, only to open for business amidst the worst market for office space for decades.

The great race to be the worlds tallest is the building frenzy Edward R. Dewey used to identify the 'Skyscraper Indicator' back in the 1940s." A new world's tallest building is invariably occupied only in the aftermath of the bull market that gave rise to its creation."

Elliott Wave Financial Forecast then presented the following close-up of TWO more recent "Skyscraper" tip-offs [Malaysia's Petronas Towers and Taiwan's Taipei 101] and wrote: "Everything points to a similar fate in Dubai."

That Burj Dubai would "open its doors in the aftermath of the bull market that gave rise to its creation" -- is a testament to the power of cultural indicators and objective treatment of historical Elliott wave patterns.

View from the top of Burj Dubai tower

Video from the top of Burj Dubai tower - the tallest man-made structure ever built, at 818 m (2,684 ft).

Mega-tower is Dubai's last hurrah

DUBAI, United Arab Emirates -- When work began in 2004 to build the world's tallest tower, Dubai's confidence also was sky high with a host of mega-projects on the drawing board or rising from the sands.

That swagger seems positively old school these days. It's been tripped up by a debt crunch that has humbled Dubai's leaders and exposed the shaky foundations of the city-state's boom years -- leaving the planned Jan. 4 opening of the iconic Burj Dubai with a double significance of hello and goodbye.

It will be both a debutante bash for a new architectural landmark and a farewell toast to Dubai's age of excess.

The Burj Dubai -- a steel-and-glass needle rising more than a half-mile -- may be the last completed work from Dubai's time of the giants. Most other of the unfinished super-projects announced in recent years, such as a second palm-shaped island or a tower to surpass the Burj Dubai, are either recession roadkill or are under consideration on a far smaller scale.

If they are still considered at all.

Dubai last week dropped what amounted to a financial bombshell -- announcing its main government-backed development group, Dubai World, needed at least a six-month breather from creditors owed nearly $60 billion.

World markets had known a day of fiscal reckoning was creeping up on what was once the world's fastest-growing city. But the depths of Dubai's red ink seemed to surprise everyone.

The Burj Dubai gala is now a welcome diversion. And one without a direct political sting: the building was developed by Emaar Properties, a state-backed firm not linked to the current debt meltdown.

"This tower was conceived as a monument to Dubai's place on the international stage," said Christopher Davidson, a professor at the University of Durham in Britain. "It's now like a last hurrah to the boom years."

The brakes also were slammed on hundreds of Dubai projects -- from residential towers that stand half-finished to a desert Xanadu that included a Universal Studios theme park and a "city of wonders" with full-size replicas of the Eiffel Tower, Taj Mahal and other famous sites.

"Buildings like the Burj Dubai are born from the optimism of the moment," said Carol Willis, director of The Skyscraper Museum in New York. "That may not necessarily be the mood when the project is finished."

Burj Dubai Still World's Tallest Building?

The Burj Dubai, set to open in January 2010, is regarded as currently being the world's tallest building, however a change in the 'tall buildings criteria' from the Council on Tall Buildings and Urban Habitat (CTBUH) could change that.

The CTBUH is an international body that decides on tall building height and determines the title of 'The World's Tallest Building', but yesterday the organisation announced a change to its height criteria.

Now, a building's height will be "measured from the level of the lowest, significant, open-air, pedestrian entrance" allowing, the body said in a statement, "for the recognition of the increasing numbers of multi-use tall buildings with often several different entrances at different levels, while also accommodating buildings constructed in non-traditional urban or suburban locations."

Before the change, the CTBUH measured the height of a building from the sidewalk outside the main entrance to the top, but they have now determined that this is no longer sufficient.

Overall, there are three revised height categories:

Height to architectural top
It is measured to the topmost architectural feature of the building including spires, but not including antennae, signage, flag poles or other technical equipment.

Height to highest occupied floor in a tower
It is measured to the level of the highest, consistently occupied floor in the building (thus not including service or mechanical areas which experience occasional maintenance access)

Height to tip
This is measured to the highest point of the building, irrespective of material or function of the highest element.

Burj Dubai affected?

So, could the Burj Dubai lose its title after just claiming it a few months ago? David Scott, ex-chairman at CTBUH and Principal at Arup doesn't think so.

"Throughout the process, we have been talking to them to define where the entrance is [the new criteria]. I do not think that it will have an impact on the current status of Burj Dubai."

"There is awareness within the Burj team of what we are talking about," he said.

"The developer Emaar is still confidential about the height of the building and we don't mind it being confidential. But if they open the Burj and don't release the height, then we will measure the height of the building. During construction it is fine, but after construction we want to know and our people want to know its final height.

"This new criteria is to solve instances where a tall building had no sidewalk and the connection to the building is through an open air shopping centre. We did not want to change the heights of all the buildings in the world, of course. But this decision has been taken to really clarify how to measure the heights for different buildings."

The Burj Dubai is said to be approximately 818m (2,684ft) tall making it the largest building in the world. However, other projects being constructed could be affected by the new rules.

The Trump International Hotel and Towers in Chicago will see 27 feet added to its height, as it will now be measured from its lower, publicly accessible Chicago Riverwalk. This means it will over take the Jin Mao Tower in Shanghai to become the world's sixth tallest building.

The Burj Dubai - still the tallest

A monument to the folly of Dubai

A year ago, a world reeling from the financial crisis looked on in amazement as Dubai threw the most expensive launch party on Earth for the opening of the five-star Atlantis Hotel.

Fast forward 12 months and a massive $300bn in planned development projects have been cancelled. The sheikdom, famed for its palm-shaped man-made islands, is floundering under $80bn in debt, and many expatriates have fled leaving a trail of unpaid loans in their wake.

The Burj Dubai - at 818m the tallest building in the world - was scheduled to open in April this year as a symbol of Dubai's achievements.

But although the building now looms over the emirate's chicest development, Downtown Dubai, Burj owners are making quiet murmurs about a possible official opening in December.

This is a far cry from the A-list studded fanfare with which the Atlantis opening was celebrated.

Dubai no longer wants to draw attention to what is now seen as a symbol of excess and all that has gone wrong in the Islamic state, one source said.

Over two decades, Dubai became the land of opportunity, reminiscent of a burgeoning New York, where would-be entrepreneurs arrived from all corners of the globe.

Many became millionaires in a property boom fuelled by cheap debt.

As late as last November, Dubai seemed invincible and recruiters reported a surge in CVs from Western high-flyers keen to find a refuge in the financial storm.

But in a matter of weeks the extent of the fallout from the credit crunch became apparent.

Credit dried up and speculators were left high and dry with vastly overpriced property that they could no longer offload.

Many of the 100,000 British expatriates who had made Dubai their home were made redundant as finance, property and tourism slashed jobs.

As visas are dependant on employment, many had just 30 days to find a new job or leave the country.

Faced with the prospect of debtors' prison, thousands simply dropped off their 4X4s and sports cars at the airport - often with the keys still in the ignition - before heading for home. Parts of Dubai

currently resemble a ghost town with occupancy levels at some luxury developments as low as 50pc.

At night, the most striking views of the skyline reveal a city with many of its buildings only partially lit.

The latest figures from Colliers International, the property consultancy, reveal that residential property prices have slumped by 48pc since last year and are expected to drop a further 20pc as more major projects are completed.

JP Grobbelaar, director of research and advisory at Colliers, said: 'One in every four units is standing empty. Unless there is a dramatic improvement in economic conditions this oversupply will continue for at least the next two to three years.'

Standard & Poor's, the credit ratings agency, said Dubai needs to raise a further $10bn for its economic support fund as it does not have enough capital to prop up its struggling government-controlled companies.

Farouk Soussa, head of Middle East government ratings at S&P, said it will be down to Dubai's oilrich neighbour, Abu Dhabi, the capital of the UAE, to step in once more.

It bailed out Dubai to the tune of $10bn earlier this year.

'The relationship is very close,' Soussa said. 'Abu Dhabi is the main sponsor in the UAE and we expect Abu Dhabi to support the government of Dubai.'

The more conservative capital is unlikely to let Dubai fail, although economists believe that support from Abu Dhabi may come at a price as it threatens the autonomy which allowed Dubai to establish itself as the Middle East's main business centre.

Property is something of a barometer of the financial health of this desert emirate, charting its ups and downs.

'Speculators were treating property like a grocer would a can of beans on the shelf, with no intention of eating it and only wanting to hold on to it for a day or two,' Grobbelaar said. 'But they got their fingers burnt.'

Today some sanity has returned to the market. Two thirds of property transactions in the past three months have been made without a mortgage, indicating serious investors are convinced the market will recover in the long term.

But whether this putative revival will return Dubai to its glittering pomp is anyone's guess.