In April 2013 I visited Dubai for the first time in more than a decade. This time it was for pleasure, whereas on all previous occasions it had been for business. Since the late 1980’s I had been to Dubai for a couple of days on business every 3 to 5 years and every time I returned there I noticed that the city seemed to have doubled in size. However, it was quite small in the late 1980’s, so a few doublings did not make all that much difference, but another few doublings since the turn of the century most definitely have. Dubai is now an incredible, vibrant, chic, dynamic, cosmopolitan city of more than two million inhabitants, of which less than 15% are the original Arabs of the region. It oozes wealth and is inundated with temporary visitors: those on holiday, those in transit and those on business. It is claimed that in 2012 Dubai had in excess of one million visitors staying overnight every single day of the year! Given how unbearable the summer there in the Gulf is, with temperatures up to 50 degrees C, that would seem like a miracle. Anyway, there is an amazing variety of good quality restaurants and cafes featuring every possible cuisine on the planet to service these hordes of visitors. They are not cheap, but also not excessively priced, and you need to know where to go if you want a glass of wine with your lunch or dinner. A lovely place to spend a short week!
It is a common misconception that Dubai’s current excessive wealth comes from oil, as is the case with all other rich nations on the Arabian Peninsula, but that is not true. Dubai’s oil reserves were relatively small and the majority was exploited and depleted during the last three decades of the 20th century. Currently, only a small part of Dubai’s income arises from a dwindling level of oil production. However, the oil revenues generated last century were wisely used to create the infrastructure to allow the development of the construction, tourism and services industries that are the motors driving the current economic success of the place.
Of course, because of its Islamic roots, there is an unpleasant, but politely ignored, undertone of latent aggression, cultural restriction and discrimination. Classes and discussions on cultural sensitivity make it clear to expats as to who is in charge, the restrictions on alcohol and that the things men may do to women against their will are viewed in a totally different light. Crimes, other than those inflicted on women (not real crimes, just inconveniences), are extremely rare, since the penalties are extreme. I do not recall seeing a single policeman the whole time I was there, but maybe they were all driving around in their Lamborghinis: thus moving so fast I could not spot them. We shall return to this subject later.
Primarily, however, I would like to examine Dubai as a financial bubble. In our (limited) experience, all bubbles burst, sooner or later. They burst because the funds fuelling them run out or get diverted elsewhere. We have had many excellent examples of bursting bubbles this century ranging from the dotcom bubble to the housing bubbles (bursting in the US, Spain, the Netherlands, to name but a few) to the global financial crises, not to mention the Greek and Cypriot Ponzi schemes. However, Dubai only suffered a minor hiccough for a couple of years from 2008 and is now back to all systems go and the sky is the limit. Why is that the case when the rest of the world is still wallowing in debt, austerity and doom and gloom?
Dubai is primarily about construction. In the past decade an incredible parade of ambitious, superbly conceived, scrupulously researched, state of the art projects have been launched, and many completed. They explicitly went after many world records, such as the best hotel in the world, the biggest artificial island in the world, the biggest shopping mall in the world, the tallest building in the world, the most beautiful fountain in the world, etc. That is why Dubai has a native population of only 300,000 Arabs supplemented by nearly 2 million expats who are employed to realise the dream. Each one of these projects costs anywhere from a few billion to many tens of billions of dollars and most of them were launched since I was previously in Dubai just after the turn of the century:
• The Palm Jumeirah
• The Palm Jebel Ali
• The Palm Deira
• The World
• The Universe
• Downtown Business District
• Burj Al Arab
• Dubai Marina
• Burj Khalifa
See Wikipedia for much more interesting stuff on these wondrous projects, including the credentials of the local boss:
This ruler is a shining example of how education is irrelevant if you have a modicum of talent and the good fortune to be born into the right family!
At the moment, I would only like to say a few words about the projects I visited on this trip. Firstly, we were staying with friends in the Burj Khalifa complex, which was opened in 2010. The tower itself, the world’s tallest building still, is but one part of the whole. The whole includes the Dubai Mall, 18 kilometres of shopping delight (or in my case drudgery) with an impressive aquarium, and the Dubai Fountain, which is exquisite, plus 9 hotels, 22 cinemas, more than one hundred restaurants and cafes and 30,000 “homes”. As far as we could tell from the Burj Khalifa observation deck on the 124th floor, the homes were all apartments, mostly high-rise. The Burj Khalifa building itself is mixed use (hotel, apartments, offices) and can house up to 35,000 people. Where we stayed was on the top floor of a seven-storey building combining a parking garage, offices and apartments with a communal swimming pool on the fifth floor. It was a lovely, quiet, roomy, well-appointed, 2-bed/2-bath apartment with a large balcony: very pleasant.
Secondly, the Palm Jumeirah we toured around mostly by car, it being the only Palm nearing completion. The whole structure is there and the vast majority of the hotels, parks, villas and apartment blocks are ready. In Dubai they say that the majority are occupied, but that only means that someone has purchased them from the developer. There are 28 hotels, in excess of 4000 luxury villas and tens of thousands of apartments. I could not find any conclusive figures on what it had cost, somewhere between $12 and $54 billion various articles claimed, nor could I find confirmation on the claim that it is sinking.
Thirdly, we wandered around the Dubai Marina, which is pleasant enough along the pedestrian walks of the waterfront lined with boutiques and cafes, but as a place to live would seem a horrifying monstrosity: a bit like large parts of Manhattan. Apparently, it will ultimately boast 100,000 “homes”, most of them in 50+ storey apartment blocks with not much more than 10 metres between them, clustered around the yacht harbour, which has room for a few hundred boats. It currently claims to have a population that is predominantly Western European, but it was the most uninspiring part of Dubai that I saw.
All these projects are bringing homes and offices onto the market at the rate of, I would guess, a few tens of thousands per year. Who is to live and work in these places? It seems to me that it can only be those committed to earning a good wage from completing the current projects and constructing the subsequent ones, plus those servicing the infrastructure to permit it all to function. But these people, the expats, in general only stay for a limited number of years and mostly do not purchase property. So now we come to the crux of the matter: who are the purchasers. If a local developer puts some tens of billions of dollars into building a Palm, money readily obtainable from the banks and government on easy terms (since the developer himself and the banks are appendages of the same government), then he must be expecting to sell the resulting homes and offices for much more than that. So, who buys all this stuff and rents it out to the expats busy building the next round of stuff?
Dubai is a cash oriented culture. Paying a restaurant bill or a shop purchase elicits surprise if you present a credit or bankcard. Arriving at a bank to open an account with a suitcase full of cash is perfectly normal. Buying a villa on the Palm with a large suitcase, containing some millions in $100 bills, is business as usual. Buying a whole floor of apartments with a suitcase full of €500 notes is a sign of the times. Of the more than one million visitors arriving every week, some small percentage arrive with such suitcases and undoubtedly the vast majority of that cash comes from highly profitable business operations not seen by any fiscal authorities. The world’s biggest industries are drugs, prostitution and corruption. It seems that the proceeds can be taken to Dubai and laundered into property ownership, no questions asked. One friend claimed that 85% of property sales are done this way, though a newspaper article I found (Bloomberg) claimed that it was only 70% of all property purchased by foreigners that is paid for from a suitcase full of cash. These cash-rich people arrive from everywhere: from Russia, from Iran, from Pakistan, from India, from Europe, from China, you name it. Of the billions in development aid that the US and Europe have poured into various places like Iraq, Afghanistan, Gaza, etc. a significant part now resides in Dubai. I remember reading a few years ago that the Pentagon was extremely embarrassed about the fact that it could not account for a significant proportion of the billions poured into Afghanistan, but that many humble Afghan officials involved with the distribution of that money had the good fortune to acquire luxury retirement villas on the Jumeirah Palm.
Hence, I suspect that Dubai’s economy is to a large extent a money laundering bubble. As such, it probably has a much better life expectancy than the more mundane bubbles. It is fed by the world’s great, dynamic, enterprising growth industries: drugs, prostitution and corruption. In addition, as the banking system in the West experiences ever more pressure from governments for reform and transparency, the traditional bank secrecy comes under attack, as we have seen in Switzerland and Luxembourg recently. Hence, illegal money must find new avenues to escape. Dubai is and will remain one of those avenues, as long as owning property in Dubai appears attractive and the boom continues.
However, one thing could change this abruptly and that is Islamic militancy. If Sheikh Muhammad dies or loses his grip and those sympathetic to enforcing the less pleasant edicts of Islam gain control, then there will be a collapse in property prices, projects will go on indefinite hold and an exodus of expats will ensue. However, I think this unlikely in the short to medium term since the Sheikh has done his best for his people, provided them with health care and education, made them all rich and, to the extent that Muslims can be happy, he has done his best to make them happy. This is true particularly for the superior species, men. There are as many servant girls in Dubai as there are Arabs of both species, 300,000 thus , so the men wishing to indulge any fantasies have plenty of captive Indian, Indonesian and Filipino girls to chose from. A book has just been published in NL about the, in total, 2 million such servant girls on the whole Arabian Peninsula and it starts with those in Dubai. It came from a doctoral research project of the Law Department at the University of Amsterdam. I shall have to read it.
Another possible issue for the future is technical. Although the best of modern technology has been applied to the construction of the Dubai wonder projects, it remains to be seen whether the design, the materials, the builders and the finishers were focussed on durability. Maybe the Jumeirah Palm is sinking and many of the 50+ storey apartment blocks may suffer from construction faults in a decade or two, but so does a lot of the stuff put up in other parts of the world.
All in all it was a fascinating five-day trip yielding much food for thought. The Emirates A380 flights from Amsterdam to Dubai and back were superb, even in tourist class, and they were on time…