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by Investors Offshore editorial staff, February 2013, 01 February, 2013
For decades to come, people will point to Dubai's 200-storey, 828-metre Burj Khalifa tower, the tallest in the world, as representing both the peak and the nadir of the city-state's adventurous grasp for regional leadership in a startling range of sectors: real estate, shipping, commodities trading, equities, Islamic finance, e-commerce, air transport and banking.
The investors who bought into Dubai's real estate boom in the last stages of the world's financial bubble, from 2005 to 2008, nursing their losses, will not be comforted at hearing that many parts of the city's complex web of commercial and financial operations are doing quite nicely, thank you, or at least have survived the crash more or less intact, and are now ready to rise again.
Not so for the real estate sector. We will examine it in more depth below; but even here there are signs of life among the ruins, and a general feeling among real estate professionals that the bottom has been reached. If that's the case – and it's a big if – then there are good investments to be made.
The city, one of the seven Emirates making up the United Arab Emirates, is a shimmering collection of skyscrapers and spectacular architectural structures rising out of the desert sands at the eastern end of the Persian Gulf, and until 2008 could easily be labeled the economic success story of the previous ten years.
Dubai lies on the south-eastern shore of the Persian Gulf near the strait of Hormuz, strategically located at the cross roads of Europe, Africa, the Middle East and Asia, making it a gateway to over 1.5 billion consumers located in countries surrounding the Red Sea and the Gulf.
The city has grown rapidly in recent years from little more than a fishing port to a wealthy and decidedly cosmopolitan and modern location. Local emiratis make up a mere 22% of the population with Indians, Pakistanis, Iranians and Southeast Asians and latterly westerners choosing to make Dubai their home. The population remains predominately Muslim. However, in contrast to growing hostility towards western values elsewhere in the Middle East, ethnic and religious tensions are rare and Dubai has gained a reputation as something of a safe haven where westerners can go about their business without fear of attack, and crime in general is very low.
Modern Dubai is the product of more than 20 years of intensive development. Prior to that, Dubai was a small trading port, clustered around the mouth of the Creek. It had grown gradually from a fishing village inhabited in the 18th century by members of the Bani Yas tribe. A flourishing Indian population settled in Dubai and was particularly active in the shops and alleys of the souk. The cosmopolitan atmosphere and air of tolerance began to attract other foreigners too: by the 1930s, nearly a quarter of the 20,000 population was foreign, including 2,000 Persians, 1,000 Baluchis, many Indians and substantial communities from Bahrain, Kuwait and the Hasa province in eastern South Arabia.
Dubai's population has increased tenfold since the 1960s to approximately 2.1 million, and now hundreds of hotels accommodate the expat workers and tourists who help run the economy - tourist arrivals reached 5 million in the first half of 2012, 10% more than during the same period in 2011.
This diversity discourages any real ethnic tensions and while war and the threat of war might simmer further north, it creates far less tension in Dubai than many might imagine it would. Arabic is of course the official language but English is widely spoken as are Urdu, Malayalam and from the Philippines, Tagalog.
Dubai’s desert climate ensures plenty of year-round sunshine, with temperatures regularly exceeding 40C in the summer, and 30C in the winter making the city and its locale a very popular choice as a second or holiday home location for Europeans and Americans, especially since ownership rules have been relaxed to allow foreigners to buy property in Dubai.
The city’s rapid growth as a financial and commercial powerhouse has also spawned the rapid development of impressive leisure facilities such as golf courses and hotels (including the world’s first seven star rated hotel, the Burj Al Arab). When combined with its coastal location and attractive beaches, Dubai has become one of the world’s premier tourist destinations. As a result, the city is served by good transport links, both by air and by sea.
There are no elections or legal political parties in the UAE. Power rests with the seven hereditary sheikhs who control the seven traditional sheikhdoms (Abu Dhabi, Dubai, Sharjah, Ajman, Umm al-Qaiwain, Ras al-Khaimah and Fujairah) and choose a president from among themselves. Sheikh Khalifa bin Zayid al-Nuhayyan, the ruler of Abu Dhabi has been President since November 3, 2004, following the death of the UAE's Founding Father and first President Zayid bin Sultan Al Nuhayyan.
The Vice President and Prime Minister is the ruler of Dubai, which was Sheikh Maktoum bin Rashid al Maktoum until his death in January 2006, following which the role was assumed by his brother and heir, Sheikh Mohammed bin Rashid al-Maktoum. There is also a Cabinet, and its posts are distributed among the seven emirates. (The members of the Cabinet are the government ministers, such as Minister of the Interior, etc.)
The parliament is known as the Federal National Council (FNC). It was established on 13th February 1972 and is considered a landmark in the country's constitutional and legislative process. The FNC advises the Cabinet and the Supreme Council but cannot overrule them. According to the constitution, the FNC consists of 40 members who are drawn proportionately from each of the seven emirates. Each ruler appoints the members for his emirate.
The UAE was a founding member of the Gulf Cooperation Council (GCC) created at a summit conference in Abu Dhabi in 1981. The members of the GCC include Saudi Arabia, Kuwait, Bahrain, Qatar, the Sultanate of Oman as well as the UAE. The country is also a member of the League of Arab States, the Islamic Conference Organization, and the United Nations.
The spectacular growth of Dubai has been no accident. With what must have seemed like limitless oil reserves, the ruling family consciously set out to create a modern, diversified financial centre, beginning with the trading activities that had been its historical life-blood. Jebel Ali, home of a huge man-made port, has the largest free-trade zone in Arabia, housing an ever growing list of international corporations which use the zone for both manufacturing and as a redistribution point. In 2012, the Jebel Ali Free Zone accounted for around 20% of Dubai’s economy and almost 13% of its labor force, employing 170,000 workers and housing 6,700 companies. Dubai's harbor is the most important port in the Middle East and is ranked among the world's top 15 in terms of container throughput. Following the success of the Jebel Ali free zone, the government has developed Dubai Internet City (DIC), which has a highly developed technical infrastructure. The DIC occupies 3,200 hectares in the South of Dubai, near the Jebel Ali Free Zone. It offers state of the art facilities and sites for manufacturing, offices, housing, and academic, research, distributions and logistics institutions.
More recently has come an equivalently grandiose airport. Dubai International Airport is second only to Tokyo in the number of daily transit passengers it handles and second only to Seattle as a sea-air hub. In November 2005, in anticipation of a huge increase in the numbers of tourists, business travellers and rising trading volumes, the Dubai authorities announced the launch of a project to build the world's largest airport in the Jebel Ali Free Zone.
The airport, initially known as the Jebel Ali International Airport (JXB), but since renamed the Al-Maktoum International Airport, will be a massive undertaking, with total infrastructure costs expected to hit USD33 billion. When completed, the airport will have six concourses, and be capable of handling more than 120 million passengers, and more than 12 million tonnes of cargo per year. Business aviation operations are expected to commence operations at the new airport in early 2013, while the commercial passenger facility is scheduled to open later in the year
Like Jebel Ali, the airport has proven resistant to the downturn, clocking up increases in passenger and cargo volumes. Indeed, by 2015, Dubai International Airport is expected to become the world's busiest airport for international passenger traffic, with throughfare of 75 million passengers, up from 57 million recorded in 2012.
“Increased liberalization, GDP growth and increasingly affluent and mobile populations in emerging markets will combine to propel air travel growth worldwide,” said Paul Griffiths, Dubai Airports CEO. “Dubai is extremely well positioned to capitalize on that growth. We are eight hours from two-thirds of the world’s population and on the doorstep of two of the most dynamic markets in the world – India and China. The combination of rallying tourism and Dubai’s established role as a trading hub linking economies in the Far East, Europe, Africa and North America, are also key advantages.”
As of October 25, 2012, Dubai International was ranked the world’s 6th busiest airport in terms of international passengers handled and 3rd busiest in terms of international freight handled, according to figures published by Airport Council International.
During the 1990s and the 'noughties', the Arab Emirate launched a series of tax-privileged and more or less self governing financial sectors, including the Dubai International Financial Centre (DIFC), which provides a legislative roof for six primary sectors of focus within the DIFC: Banking Services (Investment Banking, Corporate Banking & Private Banking); Capital Markets (Equity, Debt Instruments, Derivatives & Commodity Trading); Asset Management & Fund Registration (Fund Registration, Fund Administration & Fund Management); Reinsurance; Islamic Finance and Back Office Operations. The DIFC offers benefits such as zero tax on income and profits, 100% foreign ownership, no restrictions on foreign exchange or capital/profit repatriation, operational support and business continuity facilities.
In July, 2003, the Federal Cabinet of the United Arab Emirates (UAE) approved a Federal Decree allowing the Dubai International Financial Centre (DIFC) a large degree of sovereignty. The approval of the Decree, which allows for Financial Free Zones to be established in the UAE, marked a significant step forward for the Centre.
The Real Property Law, enacted in June 2007, guarantees ownership of freehold land and buildings, and other interest in land, within the DIFC. The Law is based on the underlying principles of English common law, but also incorporates the Torrens system of land registration, well known in countries such as Australia, New Zealand, Canada and Singapore.
Under the Real Property Law, land transactions are registered in a central register administered in the DIFC. Once registered, the Law certifies them to be fully effective. Unlike some other systems of land registration, title interests registered under the Real Property Law are “indefeasible”. In practical terms, this means that persons buying real estate in the DIFC, lending on the security of real estate in the DIFC, or taking a lease of real estate in the DIFC, can be assured that their investment is backed by the full protection of the Law.
Dubai’s financial centre is regulated by the DIFC Financial Services Authority. The advantage Dubai has over other more established financial jurisdictions in this respect is that the DFSC has had the opportunity to draft a body of regulation pretty much from scratch. This has allowed Dubai to build on a framework of established international best practice, whilst avoiding some of the flaws and complexity inherent in the older jurisdictions where regulations have been constantly amended and patched up to keep pace with developments in the financial markets. The DFSA’s rules are written in English and have been drafted after extensive consultations with leading financial institutions.
The DFSA has also been accepted into the international capital market regulator IOSCO (International Organisation of Securities Commissions).
The number of active registered companies operating within the DIFC rose during 2012 to reach 912 companies at the end of December 2012, a 7% year-on-year increase, while the workforce of registered companies leapt by 16% during the year, to 14,000 persons.
The DIFC is now home to 19 of the world's top 25 banks, 11 of the top 20 money managers, eight of the top 10 insurance companies, and six of the top 10 legal firms.
The DIFC also houses the The Dubai International Financial Exchange (DIFX, but known as NASDAQ Dubai), the Dubai Metals and Commodities Centre (DMCC), incorporating the Dubai Gold And Commodities Exchange (DGCX), and the Dubai Mercantile Exchange (DME), focusing on energy trading starting with crude futures.
It may not have been the original intention of Dubai's rulers to create a major international real estate centre; but it happened to them nonetheless, originally because of the need to provide accommodation for the swelling numbers of expatriate workers sucked in by the infrastructure construction programs. Eventually the real estate sector took on a life of its own, and the financial problems which now beset the Emirate can be traced to this cause. The rulers created Dubai World as a quasi-state financing agency for real estate development, and when the Emirate was infected by the world-wide property collapse in 2008, it was Dubai World that was found to be over-extended.
After property values fell by 50% in just 12 months, the chickens finally came home to roost in November 2009 when Dubai World announced a debt moratorium for at least six months.
The government said it intended "to ask all providers of financing to Dubai World . . . to 'standstill' and extend maturities until at least 30 May 2010". The total debt of Dubai World amounted to USD59bn, and it was one small short-term component of that, falling due in December 2009, which the company was unable to finance.
World markets initially fell, but soon recovered, and as before Abu Dhabi, the richest of all the Emirates, stepped into the breach with further short-term financing.
Dubai World announced in May 2010 that an agreement in principle had been reached with the Coordinating Committee (CoCom) representing the company's financial creditors on the restructuring of USD23.5bn of its debt. The CoCom accounts for approximately 60% of the bank lenders. Dubai World said that the company's debt would amount to USD14.4bn after the restructuring comprising of two tranches of USD4.4bn and USD10bn with five and eight year maturities, respectively. As announced on March 25, 2010, the Government converted USD8.9bn of debt and claims into equity while maintaining 100% ownership of the company. An agreement between Dubai World and its creditors was finally secured on October 2010.
However, banks' exposure to indebted government-related entities (GREs) remain a concern, and as the International Monetary Fund pointed out in 2012, while the Dubai World debt restructuring was completed in 2011, several other troubled GREs are still in the process of restructuring. Refinancing needs and reliance on foreign funding remain high, the Fund noted in its latest assessment of the country's economy, with about USD30bn in GRE debt maturing this year and a significant amount of debt falling due in 2014–15.
Still, after many predictions in 2010 and 2011 that Dubai’s real estate market was about to bounce came to nothing, signs that investor confidence is indeed returning were revealed in sales figures for 2012 released by the Dubai Land Department.
According to these figures, just under 42,000 property transactions were registered last year for a value of AED154bn (USD42bn), which, in terms of transaction numbers, was a record year.
The transactions report issued by the Land Department showed that investors focused mainly on residential and commercial unit sale and mortgage transactions. This, the report said, reflected the growing confidence and stability in the real estate market. In 2012 these units accounted for 31,145 transactions worth AED38bn. In addition, AED111bn worth of plot transactions were conducted by developers last year. Overall mortgage transactions on units and plots reached 31,145 transactions worth AED83bn. Transactions on villas reached AED5bn, divided to 1,282 sale transactions worth AED3bn while there were 671 mortgage transactions on villas worth AED2bn in total.
These encouraging figures led Sultan Butti bin Mejren, the Director General of the Land Department, to observe that: "confidence of foreign investors in Dubai properties is unlimited as more investors from different nationalities invested in this sector.”
Jones Lang LaSalle’s review of the Dubai real estate market for the fourth quarter was somewhat less bullish, but it nevertheless noted that investment sentiment is improving, and predicted a recovery in 2013.
“While optimism has returned to the Dubai market over the second half of 2012, the recovery has been very selective and focused on only the best quality projects, locations and developers,” the report said. “2013 is likely to see a broader based recovery, but the significant levels of current vacancy and further new supply will limit the extent to which poorer quality projects and those in secondary locations will benefit.”
According to the report, the overall residential market recorded a positive year in 2012, with the villa market continuing to outperform the apartment sector. And while prime projects in well-established locations continue to see improved performance, secondary locations are still suffering from rental and pricing declines as tenants relocate to new high quality projects.
Nonetheless, both average prices and rents increased in 2012. The REIDIN Residential Sale Indices improved by 19% year-on-year with the villa market outperforming the apartment sector in 2012. The villa sale price index increased by 24% and is now 21% higher than in January 2008. The apartment sale price index improved by 12% but remains 12% less than in January 2008.
The REIDIN Rental Indices increased 7% year-on-year in 2012. The villa rent index rose by 6% and is now 2% higher than the peak level. The apartment rental index increased 7% but remains 26% lower than January 2009. Rental increases in the most demanded areas such as Burj Downtown, Dubai Marina and, Palm Jumeirah have been offset by declines in secondary and less completed locations, the report notes.
At the end of 2012, the total residential stock in areas monitored by Jones Lang LaSalle was around 354,500 units. Around 4,600 residential units, mostly apartments, were delivered to the market in the fourth quarter of 2012. The most significant completion was Elite tower in Dubai Marina, the world’s third tallest residential tower. Around 12,500 residential units were completed during 2012, 14% less than completions in 2011 and 72% less than in 2010 as developers continue to delay some of their projects. More than 45,000 additional residential units are scheduled to enter the market over the next two years, although it is likely that not all of these units will be delivered on time.
Buying property in Dubai is a relatively straightforward business, and there are many estate agencies and consultancy services catering for international buyers such as expats, those in search of a second home and investors hoping to earn rental income and/or capital appreciation. Financing a property purchase in Dubai will vary depending on which developer one buys from, one’s own budget and financing options available at the time. A typical financing structure from a Dubai-based developer might involve: a 10% deposit payable on signing; a further 10% after 30 days; five payments on each stage of construction; and a 20% final payment upon completion. Alternatively, if a more flexible payment term is needed, then it is possible to obtain a longer term mortgage. Some developers and agents will also have struck deals with locally-based banks to offer more favourable terms. In general, access to mortgage financing is more restricted than previously, as is the case just about everywhere.
For a fixed-rate loan, repayment periods typically vary from five to fifteen years in length, and rates usually rise as the term progresses. Floating rate mortgages are typically available on loans of between fifteen and twenty-five years. If employed, mortgage payments are made via a salary transfer while self-employed buyers meet payments by writing a post-dated cheque or by a standing order. Overseas residents have traditionally paid a slightly higher interest rate than residents.
Mortgage interest rates in Dubai have, in the past, followed key US Federal Reserve rates, because of the peg to the US dollar. However, successive interest cuts by the Fed prompted the Central Bank of the UAE to set its first benchmark interest rate (overnight repurchase rate) at 4.75% in September 2007.
The UAE’s mortgage market has expanded rapidly in recent years, but, as elsewhere, the credit crunch forced lenders to up interest rates and apply stricter loan-to-value rules. But lending conditions started to ease in 2011, when many banks slashed mortgage rates as property prices began to stabilise. Mortgage rates have traditionally started at around 6.5 to 7%, but in mid-2011, Standard Chartered Plc cut its interest rates in the UAE to 4.99%. In similar fashion, HSBC Bank Middle East Ltd. cut mortgage rates from a high of 9.5% in 2009 to 5.49% in 2011 and to 3.99% in 2012. Loan-to-value rules have also been relaxed, with some banks said to be lending up to 85% of a property's value.
Fearing the rise of another property bubble, the Central Bank of the United Arab Emirates announced to some surprise on December 31, 2012, new lending rules which would cap loan-to-value ratios at 50% for expats and 70% for Emiratis. The bank has subsequently put these new measures on hold for a year, but it is clear that the authorities are monitoring the real estate market closely, and do not wish to see a repeat of the correction which occurred in 2007/8.
There are legal and geographical limitations on the ability of foreigners to own freehold property in Dubai. In March 2006, a long-awaited Dubai property law was issued, but Law No.7 of 2006 stipulated that freehold is limited to UAE and GCC citizens and companies wholly owned by them, as well as public shareholding companies. However, the law also stipulated that upon approval of Dubai's ruler, non-UAE nationals may be given the right to own properties in some parts of Dubai.
In August 2006, the Dubai International Financial Centre Authority (DIFCA) published draft legislation that would allow foreign freehold ownership of property in the DIFC. The laws included the DIFC Real Property Law 2006 and the Strata Title Law 2006. These laws, enacted in June 2007, allow for foreign companies and individuals to hold freehold ownership of real estate within the Dubai International Financial Centre.
Citizens of GCC countries (Gulf Cooperation Council: Saudi Arabia, Kuwait, Bahrain, Qatar and the Sultanate of Oman) do not need visas to enter the UAE. Everybody else needs a visa. However free visas, valid for 30 days are granted on arrival for:
The main visa types for individuals are the 30-day short-term and the 90-day long-term visas. Both require clear passport copies of the sponsor and the sponsored person, a copy of the salary certificate or employment contract of the sponsor, proof of family relationship and travel insurance. Fees are AED 610-620 (depending on the method of application) for 30-day visas and AED1,110-1,120 for 90-day visas (plus a AED1,000 deposit, refundable upon departure of the sponsored person).
A Mission Visa is issued to to businessmen and highly qualified professionals, entitling them to stay for 16 days from the date of arrival. Required documents include evidence of health insurance and a clear copy of the sponsor's passport. E-form fees are AED320 and a AED1,000 refundable deposit is also required, as with long-term visas.
In June, 2003, the government announced that it planned to allow expatriate residents to move freely among GCC countries by the end of the year, something which in any case became possible with the establishment of the GCC Common Market.
In 2003, Dubai, and the United Arab Emirates (UAE) started making a determined push to increase the participation of locals in the work-force under a policy known as 'emiratisation'.
Dr Omar bin Sulaiman, CEO of Dubai Internet City, noted at the time that while the Dubai Internet City was devoted to emiratisation, this would not mean that all UAE nationals would be guaranteed a job there. "Nationals must not take for granted that jobs are waiting for them at DIC, which will scour the market to hire the most dedicated individuals irrespective of nationality. Dubai is a cosmopolitan city and we will look at all individuals of various nationalities to recruit the best. You will secure a job not because you are a citizen but because you are a hard-working citizen."
In June 2005, the body responsible for administering the programme, the National Human Resource Development & Employment Authority (or Tanmia) announced plans to deny work permits and entry visas to firms that do not comply with their prescribed 'emiratisation' quotas. The Board of Trustees, chaired by Dr Ali bin Abdullah Al Kaabi, Minister of Labour and Social Affairs, decided to step up measures to deny firms not complying with the prescribed Emiratisation quotas the right to obtain work permits and entry visas for foreign labour.