News
Despite economic slump, Dubai construction goes on
Posted on 05/18/09
The Media Line
Despite Economic Slump, Dubai Construction Goes On
Monday, May 18, 2009
The world’s largest airport, the Dubai World Central (DEC), will open as planned in 2010, and $6 billion has been raised to construct the world’s largest shopping mall in the Gulf kingdom of Dubai.
The projects will go ahead despite the fact that the government recently established a $10-billion financial support fund (FSF) to help the kingdom in its recovery from the current global financial crisis, with an additional $10 billion in the pipeline.
The construction industry in Dubai has been one of the cornerstones of the government’s plan to diversify the country’s economy away from oil. To help achieve this, two construction companies, Nakeel and Emaar, were established by the government in order to build some of the landmarks that have become symbolic of the country, such as the man-made palm islands and the world’s tallest building, the Burj Dubai, which is currently under construction.
Over the past few years, the openness of Dubai generated a huge influx of foreigners, either as tourists or as expat workers, ranging from white-collar to construction workers, leading to huge demand for housing.
Nakeel and Emaar answered the challenge and massive real estate projects were set in motion. However, as the global economy began to slow, so did the number of foreigners moving to Dubai.
“The thinking in the past was to make as much money as fast as possible. But many projects were not profitable on a cash-flow basis as occupancy ratios of many residential towers do not seem to be very high,” Dr. Eckart Woertz, program manager of economics at the Gulf Research Center in Dubai told The Media Line.
“So, the moneymaking only worked as long there was a bigger fool to sell to. That was the reality yesterday, but it’s not the reality of today and not the reality of tomorrow,” he said.
The European Rothschild Bank was commissioned by the government of Dubai last month to come up with a plan to help the country deal with the financial crisis.
The importance of the construction industry is demonstrated by the decision of the FSF to allocate funds to Nakeel, despite the fact that the recovery plan devised by the banking house has not yet been public.
Meanwhile, Tamee, the largest home lender by volume in the United Arab Emirates, may become the first company in the region to start auctioning off repossessed properties.
Until now, mortgage lenders have been reluctant to go through a system that has never been tested in the region, despite the rising number of mortgage owners falling behind in their payments due to job losses, rising mortgage rates, salary cuts and steep declines in property prices.
“We haven’t yet seen large-scale property repossessions. Many people are managing to remain afloat, but it might come. The financing of many projects, be it on the wholesale or the retail level, was not very conservative and not very sustainable,” Woertz said.