City of Gold: Dubai and the Dream of Capitalism (48 page)

Housing demand remained incandescent as the year wore on. In May, a mob turned up at the launch of a thousand waterfront apartments in Nakheel’s Badrah development. The units sold in a few hours and most of the potential buyers had to be turned away.
²
It was a scene that had grown common. Emaar avoided these frenzies by using a lottery system to pick lucky buyers for its property launches. At Abu Dhabi’s Cityscape property show, investors in Russia and the United States booked off-plan properties on the Internet and then flew in to make their down payments. When they arrived they found their apartments had been sold to others at higher prices. Demand was so intense that developers raised prices by the hour. Investors at the show flipped homes within hours, raking in instant profits. The wild speculation alarmed governments in Dubai and Abu Dhabi, and the authorities announced restrictions on quick resales. The buyers, roughly a third from the West,
were driven by an unsubstantiated belief that the government would prop up the market if prices slipped.

That year Dubai reached the limit of its capacity to build. The labor force could work no faster and there wasn’t housing enough to import more. Steel and concrete supply could not meet demand. And it seemed there were no more idle cranes to be found anywhere on earth. It was physically impossible to simultaneously build the entire supply of projects that had been launched.
³

This realization gave contractors leverage to demand higher rates. Homes that had been sold off-plan years earlier, when costs were lower, were no longer economically feasible to build. A few developers tried to cancel projects and refund buyers’ deposits. At first, authorities forced them to follow through, lest the city’s reputation be harmed.

Meanwhile, America’s subprime mortgage crisis was morphing into the global credit crunch. For a while, Dubai continued its surge. Investors rationalized the ongoing party by saying Gulf economies had decoupled from developed markets. This dubious theory proved correct for about three months.

In October 2008, the credit crunch sneaked into Dubai like a Trojan horse. No one believed that the Gulf, its banks sloshing with surplus oil revenue, could ever find itself short of cash or unwilling to lend. Oil revenues had recently been running seven times their medium-term average. Inflation was the problem. Banks were looking for creative ways of unloading their stockpiles of banknotes. Then the lights went out. Suddenly, banks had no cash.

Where did the money go? Essentially, it ran back to the home countries of the investors who’d sent it. First, currency speculators unwound their bets on the dirham’s revaluation and pulled $55 billion out of the UAE. Then foreign investors sold off their shares and took tens of billions more out in a matter of weeks.
⁴
People woke up one morning and lending had stopped. The liquidity squeeze that gripped the UAE and the rest of the Gulf came as a complete surprise in a region that hadn’t experienced a financial shock for more than three decades. Banks lost their trust in each other and in people asking for mortgages. The UAE Central Bank pumped cash into them so they could keep funds flowing to projects. But banks cut way back on mortgage lending. The real estate market slammed to a halt.

The fall Dubai Cityscape property show opened amid this unfolding backdrop. The show saw plenty of the usual glitter-glazed launches, including
Nakheel’s one-kilometer-tall skyscraper. But analysts canvassing attendees found that no one was buying. Dubai’s excess suddenly looked excessive.

Morgan Stanley was the first to articulate the looming gloom. The bank forecast a modest 10 percent drop in property prices for 2009, because of overbuilding. But, it said, things could also get much worse. Dubai might follow the pattern of Singapore in the late 1990s, when values dropped 80 percent in eighteen months. “We expect oversupply to hit Dubai in 2009, leading to a period of price declines,” Morgan Stanley’s research note said.

The city’s financial base was starting to resemble the foundation holding up its towers: sand. Earlier, or Dubai’s skyscrapers aren’t fixed on bedrock. Friction is the only thing holding their pilings in place. In the buildings’ case, it’s said to be safe. In October, Moody’s Investors Service said Dubai’s financial underpinnings were caving. Debt had swollen beyond GDP. If things went south, the government lacked the resources to pay it off. The emirate had borrowed not just to finance its signature projects—man-made islands and the Burj Dubai—but also to purchase stakes in overseas companies whose values had crashed.

Dubai’s strategy worked while its assets were bringing in money. But by the fall, the debt overhang was deepening faster than its investments were generating returns. Sheikh Mohammed faced the humiliating prospect of selling stakes in state-run companies to Abu Dhabi. The list of injured companies included those under the Dubai World umbrella and the sheikh’s own Dubai Holding. All found themselves grasping shaky assets. The go-go expansion of Emirates airline, with 177 planes on order worth more than $58 billion, was another worry. The airline is the key to the ruler’s plan to double yearly tourists to fifteen million by 2015. But vacationers in recession-gripped lands would be hard-pressed to cooperate. Orders might have to be canceled.

Cocky investors who’d crowed about “decoupling” saw their theory unwind. Dubai’s stock index was down more than 70 percent by year’s end, with some property developers losing 80 percent of their value. The wastage of Dubai’s overseas assets has been equally impressive. In 2007, Dubai World paid about $5.1 billion for almost 10 percent of MGM Mirage. A year later MGM’s $84 share price had shrunk below $20. Ports operator DP World, the company that spent a whopping $6.8 billion for Britain’s P&O shipping, saw its value wither away.
⁵

With the credit market frozen, real estate prices fell back at last in late 2008, the first drop since foreigners got permission to buy in 2002. Prices on unfinished apartments got hit hardest, dropping as much as 50 percent. As his emirate wobbled, Sheikh Mohammed took the stage at a World Economic Forum event in Dubai. It was the perfect venue to unveil the response to his first major leadership crisis. The sheikh made perhaps the worst speech of his life. First, he boasted that he’d predicted the crisis. This left audience members wondering why Dubai, with more advance notice than anyone, hadn’t prepared for the downturn. Then he pooh-poohed the jagged plunge in the Dubai stock index. His talk spooled past the bankers and economists like a catalog of non sequiturs.

“A few of my friends were wondering what’s happening in stock markets, where some shares were dropping,” the Dubai leader said. “I told them it didn’t matter. Since these shares rose from what they originally started from, technically we are still ahead. Unfortunately, people tend to be pessimistic and focus on losses and forget their gains. Investors should always keep in mind that, in trading, you may lose and you may win.”
⁶

The leader’s unpreparedness didn’t inject confidence into the economy. Dubai’s shares plumbed new lows, with some nearing their original launch values, as if mocking the sheikh’s message. A few weeks later, Dubai issued a more coherent response. It merged its two crumbling state-owned mortgage lenders and put the new entity under the Department of Finance. Dubai’s big three developers—Emaar, Nakheel, and Dubai Holding—together responsible for 70 percent of the city’s construction, stopped competing and started cooperating. Sheikh Mohammed deputized Mohammed Alabbar to lead a nine-man economic advisory council. A sober Alabbar told a bankers conference that his committee would decide where to hold the line: which projects would stay funded until they get built, and which would be choked off. “These are tough realities that we are going through,” Alabbar said. “We are rationalizing our expenditures and consolidating our activities. Times are changing.”

Alabbar wisely clarified his city’s murky financial position, revealing that Dubai’s sovereign debt was $10 billion, plus another $70 billion owed by state-run companies. This, he said, was more than covered by assets worth $260 billion. The city’s debt was greater than its entire economic output in 2007 of $54 billion. That’s higher in relative terms than the burden in neighboring countries, but far smaller than debt loads of
America and some European countries. And Alabbar dropped a hint where the city would turn if it needed help. He mentioned Dubai’s “proud identity as part of the UAE,” which, in go-it-alone Dubai, means that rich uncle Abu Dhabi would be asked to clean up the mess.

Hard times in Dubai is a relative term. Financial conferences invited bankers to blather about the crisis between bites of chocolate mousse. And nobody says a global crash means you can’t party. Sol Kerzner certainly never said that. He threw a giant bash at the grand opening of his $1.5 billion hotel Atlantis, The Palm. The seventy-three-year-old magnate flew in Robert De Niro, Charlize Theron, and Wesley Snipes and paid Kylie Minogue $4 million to sing to them. He served up two tons of lobster and dropped another $4 million on fireworks that, in the best Dubai style, blasted up simultaneously from every frond and islet on the Palm Jumeirah. If you’d been lucky enough to be in outer space, you’d have seen a palm-shaped fireworks display. From the ground it looked like shock and awe over Baghdad.

When the party ended, the global age of excess was over. Dubai was the era’s poster child. While the rest of the world appraised the party as a foolish overindulgence, Dubaians considered it a justified celebration of six years of wild growth that put the city, at long last, on the map. Downturn or no, Dubai’s accomplishments are undeniable. In six years, the city quadrupled in size and doubled in population. It became a frenzied tourist destination and the financial center and air hub for a quarter of the globe. It had produced the world’s most fanciful construction boom, sprouting islands and skyscraper pinnacles as far as the eye could see. The bubble may have burst, but it left behind an amazing physical legacy. Sheikh Rashid’s prayers had been answered. Eighteen years after his death, everyone on earth had learned of Dubai.

With so much under its belt, some Dubaians saw the coming recession in the manner that a fattened bear views a cozy cave at first snowfall. It was time for reflection and a long snooze until, at some future date, it would reemerge lean and hungry. A few years of slow growth might also readjust the woeful demographic imbalance, giving foreigners reason to leave and the local population a chance to make some babies.

“Slowing down is a blessing for this city. We’re headed for a situation where the locals might soon make up zero percent of the population,” Abdulkhaleq Abdulla says. “Sheikh Mohammed’s legacy is secure. He doesn’t need to prove anything else. He has enough to his credit.”

Dubai, of course, has been through recessions before. This one was unstoppable. Dubai’s vaunted diversification, which was supposed to save it from oil shocks, could do nothing to prevent infection. The global contagion kneecapped Dubai’s economic pillars one by one: tourism, real estate, shipping, financial services. Strive as it might, Dubai’s fortunes remain linked to the oil price.

In 1999, Sheikh Mohammed told his advisers that he wanted Dubai to become the world’s finest center for finance, investment, and tourism in the twenty-first century. He said the goal of displacing New York and London as the world’s financial capital is a difficult one, but not impossible. If it isn’t impossible, then it must be possible. If it’s possible, he told his staff, draw up a plan to get us there.

By this way of thinking, Dubai’s growth trajectory has been so steep that, if it simply keeps up the pace, the city will eventually surpass the global capitals of commerce. It’s unlikely. Before the crisis hit, Dubai had expected its financial services sector to contribute $16 billion a year to the economy by 2015, quadrupling 2006 levels of $3.7 billion. Even if it reaches that level—not likely with the business in ruins—Dubai’s financial output will be worth less than a tenth of what London, the world’s largest, produced in 2005.
⁷

Dubai will have to surpass forty-three cities to reach number one. MasterCard ranked the city as the forty-fourth largest global center of commerce in 2008. But Dubai managed to rank as the planet’s number five business center, based on travel, shipping, and hotel amenities, in which it outranked New York and Tokyo.
⁸

That’s pretty good for a town that wasn’t electrified until the 1960s. However improbable its leader’s goals, Dubai has undergone perhaps the fastest rise to wealth from underdevelopment in the history of the world. Men born into hand-to-mouth subsistence now live in greater
splendor than the tycoons of Beverly Hills and Long Island. Dubai’s rise was so improbable that it makes sense for Sheikh Mohammed to think big when he triangulates where the city will go in the current century.

Observers should be careful not to dismiss Dubai as an Arab Monaco or Las Vegas that has fizzed out. It’s more than a playground. It’s the most stable and comfortable city in a fast-growing and volatile region of 1.5 billion people. It’s the natural place for the region’s wealthy to invest, take their companies public, set up distribution centers, and buy second homes. As the wealth of the Middle East and South Asia increases, it will percolate into Dubai. It may not beat London or New York, but the city is well placed to keep expanding.

Given everything I’ve written about this fascinating place, one must understand that Dubai is not a genuine city. Yet. It’s still an unfinished collection of buildings where the atmosphere is transitory, like an airport or hotel. The population consists of flows of people rather than permanent residents. Life is superficial. Ninety-five percent of its inhabitants are temporary, with no chance at legal permanence. Whether they stay a week or forty years, they’ll never fully belong. Dubai’s expatriates are like nannies raising a rich kid. They’re responsible for his well-being and accomplishments, but they’ll never get ownership. Like nannies, they’re cast aside when their usefulness ends.