The Real Deal New York

Once mighty, Dubai wilts

Projects backed by NYC developers put on hold

March 31, 2009
By Maggie Overfelt

Plans called for a sci-fi vision of glass and steel rising up from the Persian Gulf. But the $800 million Trump International Hotel and Tower planned for Dubai — once an emblem of the world’s most extreme luxury real estate markets — is now something quite different: a victim of the credit crunch.

In December, Trump’s partner and developer, the state-owned firm Nakheel PJSC, abruptly halted construction of the tower. And that’s not the only frozen deal. Since January, dozens of high-profile projects, many backed by New York real estate moguls, have been put on hold, including the world’s tallest skyscraper, the Nakheel Tower, Busch Entertainment’s SeaWorld, the W Hotel and even the latest outpost of the Manhattan nightclub Pink Elephant.

Manhattan broker Michael Shvo, whose Web site boasts the subtitle “New York/London/Dubai,” has shelved his marketing projects for Dubai developments for at least six months. Even FXFowle Architects, which has been in Dubai since 2005, is being forced to shift gears.

“We have made a decision with Nakheel to move forward with the Trump Tower in a more favorable economic environment, as we feel that it would currently be unwise,” a representative of the Trump Organization said in a statement to The Real Deal. “We are certain that it will fare just as well, if not better, when the economic environment rebounds.”

How quickly things change. Last fall, as New York and the rest of the U.S. spun downward into a financial meltdown, Dubai, with its round-the-clock construction, seemed resilient, offering a bright spot for many foreign real estate investors. But after years of rapidly expanding loan growth, the city is now experiencing a credit squeeze and a mounting debt level that is reported to have hit about $80 billion. It has finally fallen prey to the global economic crisis.

To paraphrase a popular saying, when the U.S. sneezes, Dubai gets sick.

“Dubai’s open economy has been hit harder than most others in this region by the global economic and financial crisis,” said Moody’s Investors Service in its February assessment of the area. “This is because of the state’s relative openness, reliance on cyclical sectors such as real estate and its more limited fiscal resources.”

While some insist the city is merely suffering a price correction, others see a burst real estate bubble, as banks have stopped lending and property prices have dropped between 40 and 50 percent.

“Real estate in Dubai is very different because it’s more of a liquid asset — people would literally buy and sell contracts almost on a daily basis,” said Shvo, who opened his Dubai office two years ago. “That being said, obviously this market is going to take a much bigger hit than New York or London because things were happening a lot quicker there.”

According to PowerHouse Properties, a brokerage firm in Dubai, four-bedroom homes on the Palm Jumeirah — the iconic man-made, palm-shaped island jutting into the Gulf, where most houses have beachfront property — were selling for as low as $1.8 million, down from $3.8 million in September.

“There were too many buyers coming in at the same time, artificially pushing up demand, [but then] there ended up being too much supply,” said Mariam Nawabi, legal counsel and business development director for Emerald View Properties, a Manhattan brokerage firm that specializes in Middle East properties. “We live in a global economy now, and some areas can better insulate themselves from problems — Dubai’s not one of them.”

Nawabi said that while interest in buying homes in Dubai has slowed, her firm has been showing buyers property in neighboring Abu Dhabi, where the economy is more stable because of its oil reserves. There’s also been interest in Ajman, the smaller, quieter emirate (and capital city of the same name) that sits about 30 miles from Dubai’s

airport. In Ajman, houses go for about one-third less than they do in Dubai. “We’re going to see that area grow,” said Nawabi.

For its part, FXFowle Architects had been working with developer Nakheel primarily to design commercial buildings, but started to focus on infrastructure projects, which are more likely to be funded by the government. Construction for the company’s first bridge — the Sheikh Rashid bin Saeed Crossing — will start in a few weeks, and FXFowle is lobbying to land its second bridge project sometime later this year.

“One of the things we jokingly say about Dubai is that things we’ve been working on have slowed to a pace that’s normal here in New York,” said Brien McDaniel, FXFowle’s spokesperson. “Will the pace in Dubai get back to what it once was? Right now, it’s a waiting game.”

Most international developers and brokers, like Trump and Shvo, are waiting to see how the emirate’s government, which owns most of the city’s big development corporations, will handle the crisis. “The massive loans used to build need to be paid back now, over the course of 2009,” says Christopher Davidson, a fellow at the Institute for Middle Eastern and Islamic Studies at Durham University in the U.K. “The problem is that they don’t have the money to pay it.”

While the UAE finance ministry and its central bank have already funneled about $32 billion to banks to help with the crisis, investors are worried that the city won’t be able to refinance the billions in debt it has accumulated over the past decade.

“Unlike most other Gulf countries, and notably Abu Dhabi, the government of Dubai is not known to have a large stock of offshore financial assets that it can tap to finance fiscal deficits and support ailing public companies,” Moody’s noted.

Whether or not Abu Dhabi will step in and pass credit and financing to its sister city remains to be seen, said Davidson.

Until then, Dubai’s government is pouring any remaining resources it has into public infrastructure spending, such as roads and bridges. As a result, the world’s real estate players are waiting for better times.

“All over the world — especially in the U.S. — things are going to get substantially worse before they get better,” said Shvo. “There needs to be price corrections, and this market hasn’t even hit bottom yet.”

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