The cranes of Dubai. Are they the answer to Edward Hugh’s question?
I think anyone who visits Dubai right now is bound to be dumbstruck by the sheer scale of the construction. It, quite honestly, puts anything I saw in China in early 2005 to shame. To the naked eye Dubai looks to be building more office space than exists in lower Manhattan — and Wall Street, despite a bit of competition from the City and Hong Kong, still attracts far more IPOs than Dubai’s new international financial center. Stephen Roach found the actual data — and it turns out that Dubai is putting up the equivalent of down downtown Minneapolis in 2007, and downtown San Franscisco in 2008.
Based on industry sources, 26.8 million square feet of office space is expected to come on line in Dubai in 2007, alone — more than six times the peak rate of completions in Pudong in 1999 and nearly equal to the total stock of 30 million square feet of office space in downtown Minneapolis. Based on current projections, another 42 million square feet should come on line in Dubai in 2008 — the equivalent of adding the office space of a downtown San Francisco. There is one obvious and critically important difference between these two urban development projects: Pudong has an indigenous support base of 1.3 billion Chinese citizens. Dubai’s current population is 1.3 million. Throw in the entire native population of the UAE and the support base is still only around 4 million domestic citizens. That's right, a region with less than 0.5% the population of China is out-building the biggest construction boom in modern Chinese history.
The amount of residential construction is equally staggering. If you build it, the theory goes, they will come. The amazing thing: even with so much prospective new supply, rents and property prices are — last I checked — still going up.
I consequently fully agree with Stephen Roach's key point: the stereotype of the economically stagnant Gulf is now very, very dated. Almost as dated as the argument that China doesn’t really have a trade surplus. The Gulf is not just flush with money – it is now filled with the bustle of loads of new activity.
I don’t buy all the hype coming out of the Gulf though: the arguments about diversification seem a bit overdone. The Gulf has diversified from pumping oil to pumping oil, refining more of the oil locally and using more of the region's gas to support a petrochemical business. All that makes a lot of sense, but it is still derivative of the core hydrocarbon business. And I am not sure that spending oil dollars on construction is real diversification. If the oil money dries up, so does the construction.
The common argument that the current boom in the Gulf is different than past boomds because it isn't just based on a surge in government spending also strikes me as somewhat over-stated. Tis no doubt true that less is being spent on classic welfare spending this time around. But big government sponsored (and in some cases government financed) real estate projects are manna from heaven for construction contractor. A cynic might call the current construction boom welfare for the Gulf's business elite, which tends to be found in, guess what, the construction business. The line between spending (building a palace) and investment (building a hotel that doubles as a palace … ) can be a thin.
Moreover, massively negative real interest rates (Dubai's inflation is around 20%– per Serhan Cevik of Morgan Stanley — while nominal interest rates are around 5% due to the dollar peg) encourage lots of private investment. Some of that may not yield a positive economic return once financial conditions return to normal.
On the other hand, I am not so sure that diversification is quite as necessary as is often argued. It kind of depends if oil is going to stay around $60 or fall back to $20. If oil is around $60, some Gulf states have enough oil and gas relative to their native population that they really don’t need to diversify – not for a long time. Qatar and Abu Dhabi can live quite well, frankly, by paying others to pump their oil and gas, importing low-wage help from India and Pakistan and, perhaps, learning how to manage more of their own oil wealth rather than outsourcing the management of their money. The Saudis have a few too many people to live comfortably off their existing oil – their 2006 oil and gas revenue works out to about $40,000 per Saudi family (assuming that the Saudis’ 20 million native born population equates to about 5 million families). That's good, but not Qatar good. Qatar's per capita GDP is now estimated at $65,000.
The real challenge facing a lot of the Gulf states is that oil by its nature tends to generate a lot more revenue than jobs – so employment has to come from distributing and spending the oil rents, not generating the oil.
That brings up my last point. The current account surpluses of most oil exporters didn’t rise much in 2006, even though oil prices were substantially higher in 2006 than in 2005. Why? Clearly, spending (and investment, especially in real estate) stepped up. This is a consistent pattern. Russia’s 2006 surplus was only a bit above its 2005 surplus. Ditto Saudi Arabia. Ditto Venezuela.
We don’t (yet) have data from the UAE (effectively Dubai plus Abu Dhabi) but the sheer scale of the construction suggests that imports are way, way up. Imported building materials. Imported food to feed the imported labor force. Imported luxury goods for Dubai’s own version of Florida’s condo flippers – along with playboy sheiks, Iranian expats and Western bankers. Dubai itself must be running a current account deficit – as its investment in real estate is huge and its oil revenues small. That deficit, though, presumably is still easily offset by the surplus of Abu Dhabi, which really has a ton of oil relative to its population as well as plenty of investment income from its huge assets. But I wouldn't be totally surprised if the current account surplus of the Emirates as whole actually fell in 2006.
The aggregate current account surplus of the oil exporters clearly went up in 2006 – though I would bet that when the final data comes in, it will have increased by far, far less than initially forecast. Oil states opened the spending and investment spigots, that pushed inflation up, and rising inflation and fixed nominal interest rates turned real rates negative, encouraging private investment at precisely the moment spending and state investment was rising …
In q4 – when oil prices turned down – the oil states collectively became a major source of support for global demand. We don’t yet have the data, but my guess is that sales to Russia and the Gulf are one reason why German, Japanese and Chinese exports have all done well recently (See Edward Hugh for data on Germany and Japan, I have blogged extensively on the recent acceleration in Chinese export growth).
No one in Dubai seems to drive a US made car.
The Chinese now make — as well as use — a lot of construction cranes.
Moreover, with oil prices heading down (q4 06) or stable (q1 07), the world’s other big spender – the US – maybe wasn’t feeling quite as pinched.
In 2004 and 2005, the oil states saved most of the incremental increase in their oil revenues. In 2006, they spent – I would bet – almost all of the increase. In 2007, they likely will start spending some of what they previously saved. The combined imports of the emerging oil states should rise from something equal to the revenue of $35 a barrel oil to something equivalent to $40 a barrel oil, if not higher.
So why don’t I see more rebalancing? Look at the list of countries benefiting from the oil spending and investment boom. Germany. Japan. China. All already have big current account surpluses.
Right now, I say the odds are that existing surpluses will get bigger, not that the US deficit will get smaller. We will see.
I am always wary of these building megaprojects. To paraphrase Shoeless Joe Jackson, you can build it, but there’s no guarantee that they’ll come. I see shades of Thai overbuilding circa the mid-nineties when the (building) crane was supposedly the national bird. It’s a common overambition. Even savvy Hong Kong has overshot the mark with the so-called CyberPort project.
Perhaps those subprime lenders should head to Dubai to catch the next housing boom-bust cycle, assuming they make it out of America alive.
Brad - Great post. Once the market there collapses they can always use the empty buildings for schools!
Brad–Like Emmanuel, I am worried about phenomenal over-investment in the real estate sector of Gulf countries, particularly of Dubai. However, its collapse may not have much impacts on the global economy, apart from some dent on German and Japanese exports as well as Chinese exports, although the impcts on the Gulf economy might be huge. Also, I would say it is much better than intensified arms race in the Middle East.
I guess one need to figure in the overseas investment of the Gulf States as well while calculating the surplus. Dubai is merrily building smart cities all across south Asia and places like Morocco.
http://www.bloomberg.com/apps/news?pid=20601087&sid=axGQhP5HKIYo - Central Banks Diversify Reserves, Reduce Holdings of Dollars, Survey Shows
Ugly news for dollar, things are really accelerating now.
Those European banks want to be covert before any Chinese bank move.
Can’t help but wonder how much the trade in financial services distorts everything:
“…Bermuda is the richest country in the world, with a GDP per person estimated at almost $70,000… This has encouraged other countries with small domestic markets to set up financial centres of their own to pull in offshore money—most spectacularly Dubai but also Kuwait, Saudi Arabia, Shanghai and even Sudan’s Khartoum, not so far from war-ravaged Darfur…” http://www.economist.com/surveys/displaystory.cfm?story_id=8695139
Alot of the construction projects across China but especially Beijing will complete by the end of 2007, simply because the Chinese government has mandated that construction will be prohibited during the summer 2008 Olympics. If developers haven’t completed their projects by the end of this year, they have been ordered by the Central government to postpone construction until after the summer 2008 season. Since this is well known in advance by everyone in China, foreign economists should not be alarmed over the government planned 2008 shutdown of the Chinese construction industry.
Dubai’s enormous gamble has to be admired for the sheer willingness to take a risk. Construction of modern cityscapes may not be the most productive investment in the world from an industrial point of view, but it’s not completely wasted either. I’ll bet Dubai’s planning on a rapidly expanding population, tourism, financial center development, and more. Leapfrogging the whole industrial story, into the services world, so to speak. Look at demographic rates in Middle East. Schools are setting up branches left and right in Dubai and other places. Investing in US Treasury bonds is maybe safer, but not nearly so safe as most of us think, given world economic development trends. And as Najil M points out, Dubai investment is flowing elsewhere, and in more benign forms, than Saudi Arabia’s.
Question for China is, are you really going to start buying global equities with your Investment Fund? Anybody have a clue on that?
“…Normally a secretive bunch owing to the conservatism of central banks and the scale of their investments, reserve managers told the journal Central Banking of rising pressures to provide their governments with decent returns in a low-yield environment… With these attitudes, reserve managers are following the rest of the investment community into riskier assets, rather than standing on the sidelines as they would have done years ago. Rather than thinking there is a problem with moving into riskier assets just as everyone else is doing so, the reserve managers showed frustration that their internal investment guidelines prevent more risk-taking…” http://www.ft.com/cms/s/e5c6e0ae-c526-11db-b110-000b5df10621.html
“…but it’s not completely wasted either. I’ll bet Dubai’s planning on a rapidly expanding population, tourism, financial center development, and more. ”
There’s no way in hell Dubai’s or UAE’s population can grow to the extent/level that justifies its massive construction binge (on a China scale).
“…Leapfrogging the whole industrial story, into the services world, so to speak.”
Yes. This is the essence of the Gulf story. They have their eyes set on a post oil world and they have no intention of going back to the desert unlike their wahhabi/bedouin cousins in a large kingdom nearby. Basically, they are rushing to become another Singapore (or hong Kong) of the mid-east with a diversified play in real-estate, finace/banking, tourism/shopping/entertainment, shipping/business registry. Additionally, they also have huge ambitions of becoming the source/conduit of future investments in to South Asia and other east Asia as the India growth story matures and spills over into neighboring countries. Already, UAE’s investment income can massively smooth out any y/y setbacks in CA surpluses. And the size of their total net investment assets is (i think) estimated at nearly 2X GDP.
the thing about the uae is that it hardly exists as a federal entity — tis really a collection of independent sheikdoms (hence very crappy overall data), with some cross subsidies.
Abu Dhabi = massive assets, way more than 2X GDP.
Dubai = assets and liabilities (on the external and i suspect internal side).
Dubai also aims to be the haven for various iranians, saudis and russians with money who want a place they can move to should things happen at home … you buy an apartment, you get residency.
but the scale of the construction almost requires that all the bankers in london who now manage gulf assets (and russian assets) relocate to the gulf, which probably won’t happen.
“Yes. This is the essence of the Gulf story. They have their eyes set on a post oil world and they have no intention of going back to the desert unlike their wahhabi/bedouin cousins in a large kingdom nearby. Basically, they are rushing to become another Singapore (or hong Kong) of the mid-east with a diversified play in real-estate, finance/banking, tourism/shopping/entertainment, shipping/business registry.”
tourists in a post oil world ? do you mean refugees ? a world without affordable oil would also be without affordable food. i cannot relate to this picture . . .
“…The acceleration of growth in 2006 caused many forecasters to become more optimistic about Germany, and some even began to predict an economic renaissance in Continental Europe… But all this excitement appears misplaced… Both industrial production and factory orders fell in December…” http://www.ftportfolios.com/retail/research/viewresearcharticle.aspx?Id=269
So how much of the office building is on spec and how much is committed space? Easy to build spec space but to get long term tenants is another whole story.
And I’m going to change my London job for a Dubai job and a total cultural backwater? Not likely in my life.
THe housing bubble is global. THis is the first global housing bubble in the human history. And the skycrapper phenomenon embody better than I ever hoped the interpretation I gave of the myth of the babel tower.
Debt fuels skyskraper, an increase of the general level of debt equals to increasing expectations on the future, more postponed on tomorrow, more attachment in buddhist terms.
But as buddha said, attachment leads to delusion and delusion to suffering.
THe buildings will be empty, most of all because this is a global housing bubble, this bubble has boosted the world economy but as it unwinds it ll depress the same world economy and most of all the open economies who bet on tourism and housing, stuff that only rich people can afford.
It s easy to forecast future. Lower asset prices will mean lower inequalities, falling profit with stagnant wages, prices falling faster than wages will mean quantitative adjustment through unemployment etc.
Dubai is the perfect example of a rotten economy, they had oil extracted for others, and after that, they ve wanted to move straight to the finance and tourism era, they never tried to build an industry producing useful stuff for their own people. After being exploited for their rsources they moved directly to being unproductive speculators. Great.
funny thing about dubai condos is that it has been easy to sell space in a new development — taking the risk off the developers’ (often the sheik or the sheik’s buddies) books. but the buyers are themselves buying on spec — they are flipping for a profit, often several times before the building is completed … it all works until the music (rising prices) stops.
yes, the housing boom is global …
oil savings are financing a building boom in dubai, doha, moscow and St. petes (and no doubt soon in Saudi arabia as well) … with very negative real rates helping.
oil $ are pushing up housing prices in london …
and oil $ plus asia’s savings surplus have bid up us and european home prices too.
the global answer to the emerging market savings glut has been “residential and commercial real estate” — whether new investment to sop up the surplus or rising prices (and lower yields) …
ironically, perhaps a bubble in alternative energy investments as well:
“…While SunPower Corp. and Theolia SA are among more than 180 companies whose shares have surged as much as 240 percent this year… the market’s nimblest investors… reduced their stakes in solar-power and ethanol producers in the fourth quarter… The hedge funds manage about $86 billion. “As an investment play,” global warming is “a bubble”… Anyone looking for corroboration of that assessment may find it in the so-called short selling of U.S. alternative-energy stocks last month, which climbed 45 times faster than the average for Standard & Poor’s 500 Index members….” http://www.bloomberg.com/apps/news?pid=20601109&sid=aqBr9N4m4Rko&refer=home
Dubai’s rise is the mirror of Lebanon’s decline. They are both in the same niche, but Israel has made Lebanon unviable as a banking/money laundering/hideout/ “booze, gambling and girls” centre. Enter Dubai…
Whether Saudi Arabia proves to be a different story: “Lyondell Chemical said yesterday that it had agreed to sell its titanium dioxide pigment business to an affiliate of the National Industrialization Company of Saudi Arabia for about $1.2 billion…” http://www.nytimes.com/2007/02/27/business/27chemical.html
>>>And I’m going to change my London job for a Dubai job and a total cultural backwater? Not likely in my life.
I’ve been wrong before, but years ago a friend bought a condo in Dubai, and this year another. The increase in tenancy and population won’t come from London, but from around the Middle East and from neighbor states incl Pakistan. Outflux of Iraqis ring a bell? Let’s not be too Western-centric in looking at the gamble in Dubai. GDP growth in rest of world outside US is higher and likely to stay higher for a long time. I don’t see Dubai filled with French bakers and London bankers, but with a different mix of people entirely. Maybe they see that too?
>>And I’m going to change my London job for a Dubai job and a total cultural backwater? Not likely in my life. >>but the scale of the construction almost requires that all the bankers in london who now manage gulf assets (and russian assets) relocate to the gulf, which probably won’t happen.
>>>And I’m going to change my London job for a Dubai job and a total cultural backwater? Not likely in my life. >but the scale of the construction almost requires that all the bankers in london who now manage gulf assets (and russian assets) relocate to the gulf, which probably won’t happen.
blog isn’t allowing responses with quotes.
>>>And I’m going to change my London job for a Dubai job and a total cultural backwater? Not likely in my life.>but the scale of the construction almost requires that all the bankers in london who now manage gulf assets (and russian assets) relocate to the gulf, which probably won’t happen.
“…And I’m going to change my London job for a Dubai job and a total cultural backwater? Not likely in my life.”
Your forbearers never made the British empire what it became by not venturing out to the “cultural backwaters” and your kids may not have decent jobs if they do not look beyond London.
“…but the scale of the construction almost requires that all the bankers in london who now manage gulf assets (and russian assets) relocate to the gulf, which probably won’t happen.”
There’s more to expat communities and notions of cosmopolitanism than just British bankers. You make such conceptual flaws at your own reputational peril.