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DUBAI: Dubai is reviving massive real estate projects as its economy recovers from a corporate debt crisis, but this time around, constraints on financing are likely to slow the pace of its building boom.
Memories of the crisis will keep many investors cautious about stumping up money before projects are completed. That will leave the plans heavily dependent on bank loans and the bond markets - and the global climate is not favourable for banks.
Official announcements over the past few days have recalled the heady days of the mid-2000s, when Dubai was building some of its most flamboyant projects, including the world’s tallest skyscraper and an archipelago of man-made islands.
Dubai’s ruler Sheikh Mohammed bin Rashid Al Maktoum unveiled plans last week for Emaar Properties and conglomerate Dubai Holding to build a complex housing 100 hotels and the world’s biggest shopping mall.
He did not say how much the project would cost but one local property analyst, speaking on condition of anonymity in the absence of fuller details, estimated it would cost between $20bn and $50bn. The upper end of that range would be well over half of Dubai’s annual economic output.
On Monday, Sheikh Mohammed announced that Dubai planned to build a Dh10bn ($2.7bn) complex of five theme parks. Other projects dusted off by the government and property developers in the last few months include a canal to the city’s business district and a $1bn replica of the Taj Mahal.
It is by no means certain that all these plans will go ahead. Dubai has a history of cancelled projects: plans for a kilometre-high tower, an underwater hotel and a huge waterfront development were mooted in the boom years and never happened.
But unlike projects which ran into trouble during the crisis of 2009-2010, the viability of the new plans will be based to a large degree not on Dubai’s volatile real estate market, but on revenues from tourism and retail spending.
So if the emirate’s tourist boom continues, the projects may pay off. Passenger traffic at Dubai International Airport is growing at an annual rate of well over 10 percent.
Nevertheless, in the aftermath of Dubai’s crisis, it would be difficult to finance much of the projects by pre-selling parts of them, said Craig Plumb, regional head of research at consultancy Jones Lang LaSalle.
“There is natural caution among investors to buy off-plan. There is investor appetite for some small off-plan projects but certainly not at this scale,” he said.
“So where the money is going to come from for this project is a question that Emaar and Dubai Holding will have to address soon.”
In contrast to its oil-rich neighbour Abu Dhabi, Dubai’s government does not have the large fiscal reserves needed to finance the projects; it was forced to take a last-minute $10bn bailout from Abu Dhabi at the height of the crisis to avoid a bond default of a state-linked developer.
The International Monetary Fund estimates Dubai’s government-linked entities will need to repay about $9.4bn of maturing bonds and syndicated loans in 2013 and $31bn — much of it loans that were extended during the crisis — in 2014. It calls refinancing these amounts “a challenge”.
So Dubai will need to finance its projects from the markets, and the loan markets do not look as attractive as they did in the mid-2000s, when banks were scrambling to lend to the emirate.
European banks have been cutting back their foreign lending because of financial pressures in their home countries, while many have been burned by Dubai debt restructurings since 2009.