Dubai, aiming to further strengthen its position as Middle Eastern hub for transport and tourism, has embarked on several major construction projects that bear some of the hallmarks of the debt-laden boom years in Dubai.
The Dubai Ruler, HH Sheikh Mohammed bin Rashid Al-Maktoum, last month, ordered construction of a new city, named Mohammed bin Rashid City, worth more than $10bn. It comprises 100 hotels, world’s largest shopping mall, art galleries, exhibition centers and parks.
Soon after, there were announcement plans for $2.7bn leisure complex comprising five theme parks. Dubai is also bidding to host the World Expo 2020, the first-ever time a city in the Middle East would host the event, which requires construction of an exhibition centre on the outskirts of the emirate.
Although Dubai is enjoying economic recovery due to improvement in major areas such as trade, transport and tourism, it still has to repay $100bn debt from previous property boom in 2008. Hence, the current plan leads one to think about how these ambitious construction projects would be financed, and if it will lead to over-supply in a still-fragile property market.
Sheikh Mohammed says that the projects will help boost Dubai’s economy and infrastructure. However, questions remain if Dubai can resume constructions on the scale of last property boom.
During the boom years (2004-07), various Dubai-based entities expanded quickly on cheap debt provided by local and regional lenders. When the global crisis set in, property prices in the emirate plunged by 60%, leaving banks with debt hangover, which they are still struggling with.
Some analysts have expressed concerns about whether Dubai is repeating its mistakes of the past by paving way for another property boom. For instance, details on how the Mohammad Bin Rashid City will be financed still remains a question mark. The project, whose exact cost is yet to be revealed, will be developed by Dubai Holding.
According to estimates by analysts at Shuaa Capital, the Dubai government and some of its affiliates have raised $8bn this year, to restructure old debts, signalling re-opening of debt market for the emirate. With the European banks retreating from the bonds and loans in the region, the spotlight turns back on local lenders such as Dubai Islamic Bank or Emirates NBD, which are eager to boost their lending after several years.
All this has led to concerns that a new lending bubble may be on the anvil, and Dubai should be careful not to repeat its mistakes.