Bust-busters wanted: the brash boom city of Dubai may boast the tallest building in the world, but tumbling asset values and huge debts sent it begging to its creditors last year. Can CIMA members help to restore confidence?
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Dubai has been in the news for all the wrong reasons recently. The region, which is one of the United Arab Emirates, has been trying to carve a niche as a luxury tourist destination and financial and global trading hub. In November 2009 it made headlines when its state-owned trading conglomerate, Dubai World, asked for a delay on repayments for a debt estimated to be about $60bn. This triggered crisis talks with lenders around the world, accompanied by much media debate about whether the investment was sound or sustainable. The debate rumbles on and in July Dubai World met its creditors to discuss restructuring $23.5bn of its debts.
One of the problems is that the state's ambitious and notoriously extravagant development plans have been funded largely by its ruler, Sheikh Mohammed bin Rashid al-Maktoum, via Dubai World. Although the area's initial wealth was based on oil revenues, Dubai has far less oil than its much wealthier neighbour, Abu Dhabi, so much of this speculative development was funded by sovereign debt--although the exact details of its finances have been hard to establish. What is clear is that the global financial crisis hit the region hard, particularly damaging Dubai World's property investment arm, Nakheel.
Last month Dubai World announced plans to sell some of its biggest assets, including port operator DP World and the Jebel Ali Free Zone, and its stakes in hotels and resorts around the world. The jury is still out on whether this will be enough to restore investor confidence.
In particular, property prices in the region have fallen by about 50 per cent. As the Financial Times economist Willem Buiter noted in November last year: "The Nakheel sukkuk ... is secured against assets constituting two plots of land [it] is developing in Dubai. When the sukkuk was issued in 2006, that land was valued at $4.22bn." By the time he was writing he believed that this value could have fallen to "anything between nothing and $2bn".
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"In the case of Nakheel", Buiter continued, "pointless marble has been overlaid on redundant bricks piled on top of unnecessary concrete poured on marginal land that was ludicrously overvalued." Similar overvaluations had been used for many of the assets owned by other Dubai World subsidiaries. In short, a classic bubble was bursting.
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This is not to say that the underlying business models of many of Dubai World's schemes are not sound. But...
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