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The Dubai bubble

I was fortunate enough to be sent to Dubai this week with work, a rare trip out of the office for me as I don’t frequently get to travel with work. Not only did it present an opportunity to absorb some last minute sunshine before the inevitable grey winter days set in, but also my first chance to visit Dubai.

My first impressions upon arriving in Dubai were ‘yikes this is hot’ and that was merely just exiting the airport late at night.

Anyone that has been to Dubai will not have missed the large number of building sites scattered all across the city, with cranes as common a feature of the skyline as the skyscrapers that the city is famous for. Everywhere you look there are massive projects taking place, from the impressive Burj Dubai which is now the tallest building in the world to the recently opened Metro which they proudly declare as the longest driverless train route anywhere on earth.

But after a few days it became clear all was not well in this city as the majority of building sites remained dormant. In fact the only ones showing signs of activity were the government funded projects, clearly another symptom of the current lack of credit available in the markets. Talking with locals I discovered that even the Burj Dubai, the latest icon in the skyline, remained an empty shell of a building as they were not currently fitting out the inside of the building.

Dubai grew very rapidly, in fact you only have to go back 20-30 years before they discovered oil in the UAE and it was a little known town. Like so many booms it became a victim of speculators rushing in with a flood of outside capital being pumped in to the economy. The oil wealth largely remained in the hands of a few powerful and now very wealthy families, who constantly try to out do each other with bigger, better and more expensive developments.

Property prices exploded so quickly that it was impossible not to make huge profits when developing, to such an extent that nobody actually had to occupy the property once it was built. These empty skyscrapers could be used as security to borrow more capital to develop something even bigger and the cycle went on and on for years. This illusion could continue for as long as the money kept pouring in driving property prices ever higher. But the global ‘credit crunch’ burst this bubble and stopped development almost over night, leaving half finished skyscrapers as a constant reminder that the good times are on hold.

I am sure demand for commercial and residential property will continue to grow in Dubai, especially as the government presses ahead with vital infrastructure projects and its appeal to companies as a tax haven remains. But it will be years before more property is actually needed, and thus demand can catch up with supply. So those unfinished buildings may remain in that state for some time yet.

I’m writing this on the plane having just left Dubai and it is clear looking out from the plane window that there is no shortage of land ready to develop in the future; in fact there are huge sections of roads surrounding empty plots ready for future expansion. These sandy wastelands today will no doubt be Dubai’s suburbs in 20 years time. But with so much available space, supply will probably outstrip demand for at least the next generation and any future boom in property prices will inevitably be just another bubble.

My intention is not to criticise Dubai, nor kick the city whilst it is down. I actually think what they have achieved in such a short space of time is highly impressive and that in the long-term the city will be a great success. But it’s another reminder that prices that rise dramatically because of demand exceeding supply in the short-term are unsustainable where supply is not constrained by some limiting factor.

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