A lot is happening in Dubai… I’m fascinated by this city and could never understand it, despite coming here for over 15 years.
Let us start with the most obvious: Rents.
Rents are falling… so that is a sign of a retreating economy, one that is shrinking. I’ve spoken to various property dealers who are licensed and are operating in UAE for more than a decade, barring the 2008 financial crisis this is the first time they have seen so many properties on the market, and a decline in apartment rental. A lot of people are not renewing their lease, instead, shopping around for more economical options, of which there are plenty.
Residential rents have fallen significantly. It depends whom you talk to. Some say as much as 30% others cite numbers as high as 60% for certain locales.
Supply clearly outperforms demand nearly 50% more.
Commercial rentals have also fallen, but because most of them are tied to specific commercial loans, the impact in price downfall for many properties has not been too much, but suffice to say, plenty of offices to rent, and no tenants. A classic example is to walk around the builds near the Dusit Thani intersection/junction.
Commercial and residential real-estate prices are in some cases 1/4th of what they used to be in the hey days.
Dubai was recently voted as one of the most expensive places to live in (despite the falling rents). Cost of living is just too high and not enough to sustain. A lot many families and migrant workers move to Dubai and Abu Dhabi, only to discover that they sustain their lifestyles after a couple fo years and opt to return back. As always, someone is always waiting to take their place, a formula that has worked extremely well for UAE – selling the utopian dream).
This is the disturbing one. Commercial credit is shrinking fast. Established credit lines are being closed, or shrunk. I’ve personally spoken to bankers in UAE who are responsible for credit, risk, etc. and they cite they have never seen this before. Client with exceptional credit worthiness, zero default rate, timely payments, are now negotiating with the bank to close down lines, recover as much as they can to the dollar amount loaned off.
It is that serious.
Many buildings have taken a slow down approach. Two of the largest construction companies have added buffer days to existing payments and also introduced buffer days to project completion.
From a commercial point of view, this is highly disturbing.
If one goes into the malls, etc. the hoards of people are ever present, but when I asked the taxi drivers or the general mall staff, they tell another story. Less and less shoppers, more and more people just wanting to get out of the house, come and eat here, spend a few hours and go home.
Taxi queues with shopping carts has significantly fallen (another small measure indicator of whats happening).
Checks bouncing are still at an all time high. Stimulus packages from Abu Dhabi are hoping to jump start the economy and give it the much needed boost: Abu Dhabi Plans $13.6 Billion Stimulus Program for Economy
Elsewhere, rabbits foot and prayer beads are hard at work to make the UAE economy bounce-back. The UAE economy is set for rebound from this year.
Bonuced cheques are up, up and up!!! UAE Records Bounced Cheques Worth $7.1 Billion In Early 2018
A lot of people have been laid off in Emirates. The flagship airline of the UAE. A lot many planes are now parked (pilot shortage? seasonal adjustment? who knows): Emirates Could Store 45 Planes In Coming Weeks Due To Pilot Shortage – One Mile at a Time
People (read: friends) who work at Emirates say every day is tense. You never know when you will be given the pink slip.
The Political Feud and Its Consequences
With the one-year old political feud with Qatar, a lot has happened on the political front.
Qataris have left en masse. That means they have slowly taken their money andtheir wealth away. The quarrel (to put it mildly) with UAE is not going to end soon.
Iran – which is seen as a regional threat by the Emiratis and Saudis, have slowly started pulling their money out. By some estimates, 40% of Iranian trade was with UAE, how that will shape later on – we will see.
Saudi Arabia, whilst bosom buddies with UAE, are pursuing their own liberal path. Saudi Crown Prince Mohammed bin Salman’s (affectionately known as MBS) recent measures of liberating Saudi Arabia from its conservative clutches and also launching a new city project called Neom, is going to divert funds from UAE to Saudi Arabia.
A lot of Saudis invested their money in UAE, and have earned a handsome payback on it. Now the returns are not to attractive. Neom can change all that. With approximately US$ 500 Billion needed to fund the city over the next 20 years, you will see a healthy repatriation of Saudi owned funds from UAE back into the Saudi economy.
Along with this, expect Emiratis to follow suit. A lot of Emirati money will also have an outflow effect.
This is serious amount of money. Kuwait, Bahrain, Egypt, etc. are all planning to invest in the new city. If MBS survives the Kingdom hold for a couple of many years, Dubai and Abu Dhabi could see a commercial money crunch.
As Iran and Turkey came to Qatar’s aid, a lot of Iranian investment is slowly being pulled out and head to Qatar and Turkey. Even Turkish citizens are investing in Qatar and not UAE.
China’s One-Belt-One-Road initiative has made a lot of countries optimistic about their homeland. How it will eventually unfold, remains to be seen, but take Pakistan for example, where the CPEC (China-Pakistan Economic Corridor) initiative has got a lot of people excited about investment opportunity in Pakistan. Not to mention, there is a tax amnesty scheme offered by the federal government on bringing back money (undeclared money) and pay between 2% to 5% tax on it and obtain legal status of the money, i.e. whiten the money. This will lead to a small but noticeable reversal of money from UAE back into Pakistan.
With the air blockade that Saudi Arabia, UAE, Kuwait have on Qatar, Qatar Airways has to take longer routes to serve its markets and not to mention, they lost out on all local GCC flights.
The counterpunch if you will? Qatar has decided to offer amazingly low prices on its flights, now essentially stealing customers away from Emirates.
So much so, that in the recent months, Doha Airport and Qatar Airways have taken the spotlight and Emirates and Dubai Airport are nowhere to be seen.
If you look at Etihad Airways, the airlines for Abu Dhabi, that is in dire condition, it just posted a US$ 1.5 Billion loss (Read: Will Etihad Airlines Financial Problems Help Kill The Airbus A380?). Service levels are deplorable, loss making sectors, so clearly, that’s not working well either. Due to the allegedpilot shortage at Emirates airlines, pilots from Etihad are being loaned to Emirates. Truth of the matter is, Etihad is game over, however, pride might prevent that from happening. Etihad Announces Details Of Their Radical Restructuring – One Mile at a Time.
So, air travel is down, Saudi money is on its way out. So is Iranian, Qatari and Turkish money, commercial credit is shrinking, rentals are down, jobs are scarce, what is working for UAE?
Whilst that may be the logical answer, I highly doubt it. Sheikh Mohammed bin Rashid Al Maktoum who is also the Vice President, Prime Minister of UAE as well as Ruler of Dubai, would not bet the future of the City (country?) on a single expo.
He is super smart and plays his cards extremely well.
Honestly, when was the last time, you really wanted to hop on a plane and attend an Expo? Me neither. I can’t recall.
The Playbook that No One Knows About.
The Rulers of Dubai and Abu Dhabi have some aces up their sleeves, but it is anyone’s guess as to what it is. Whatever it is, it is what will propel their respective economies forward in this day and age of lowering oil prices and regional downturn.
Downsizing is a word that just doesn’t gel well in the middle-east. It is somehow associated with pride and let’s just face it – downsizing or speaking of downsizing, hurts pride.
UAE is not immune to downsizing. Economic conditions mandate that downsizing must take place and refusal to do so, will hurt the economy even more.
However, there have been some extremely positive steps taken recently by the UAE government.
For starters, 10 years Visa for investors and talented students. Eliminating the 3,000 Dirhams fees (mandatory deposit) for each worker and it is now replaced by 60 Dirham insurance. Yes, 60 Dirhams only per annum.
Workers insurance now includes Work Injuries clam, remuneration for extra working hours, a plane ticket back home, vacation allowance, and end of service benefits.
48-Hours tourist visa can be obtain free of charge (this is a major plus). This visa can be extended up to 96 Hours on a nominal fees of 50 Dirhams.
However, one of the biggest plus has to be the 6-months extension on the existing visa after one loses employment to seek another job, without having to exit the country immediately.
War in Yemen
The war in Yemen is also going to be a costly affair for UAE. Not from a war point of view, but from a human rights point of view. There is a lot of clampdown that is happening in UAE, and this will not be snuffed out easily. It will end up costing the government of UAE in some manner. Human Rights abuse claims are bone shattering and if it proves to be true, UAE will have to deal with more than just an economic recession, but an image depression as well.
The Guardian did a harrowing report on the issue (it is my understanding that this is article is blocked/censored in UAE: Sexual abuse rife at UAE-run jails in Yemen, prisoners claim)
Alternative Investment Options
UAE, especially Dubai had the unique privileged of being the best investment option in the middle east.
Not any more.
UAE’s economy hinges on trade and being the magnet for regional money. It has always been the sink for money all around it. India, Pakistan, Iran, Nepal, Afghanistan, Bangladesh, Lebanon, Jordan, GCC countries, etc.
The game has clearly changed.
When you have more than one sink for money, then money flows divert. I personally thing the two new sinks are: Saudi Arabia and Qatar. With three possible options for money to flow, UAE is in a pretty pickle.
How it will eventually play out – is the ultimate question to which their are a varying degree of answers. I for one think they will weather it – there will be a price to pay, but weather it, they will. But things are not rosy for the country.