Dubai – The World’s Tallest Building and a Few Surprises

By now, the whole world seems to know about the Dubai real estate fiasco.

There have been more than enough stories written about the astounding collapse of the Dubai property market and the potential default on its debts. In a short period of time it went from being one of the world’s best performing property markets to one of the worst.

Our December 3, 2009 article entitled 2010 Real Estate Forecast – Dubai & Vancouver provided early details on the crisis:

News from Dubai stunned the world on November 25, 2009 when it was announced that the government-controlled holding company could default on its debt approaching 60 billion U.S. dollars.

The Dubai government said in a statement: “Dubai World intends to ask all providers of financing to Dubai World and Nakheel to ’standstill’ and extend maturities until at least May 30, 2010.” This was in effect a declaration of a six-month suspension of debt repayments.

Although the suspicions of Dubai’s problems abounded, people were still stunned by this sudden disclosure of the severity of Dubai’s debt predicament. It seemed that Dubai was headed for a default.

Dubai, being one of the 7 emirates of the United Arab Emirates (UAE) federation quickly looked to its oil rich neighboring emirate, Abu Dhabi for rescue. Abu Dhabi produces most of the UAE’s oil and holds 90 per cent of its reserves.

On December 14, it was announced that Abu Dhabi, the wealthiest of the emirates had agreed to bailout Dubai with a $10 billion rescue package.

Sheikh Abdullah Bin Zayed al-Nahayan the foreign minister of the UAE went on to say the following in a December 17, 2009 Reuters article:

“The economic crisis in Dubai is over,” he said.

The lifeline to fellow-member Dubai “is proof that the UAE is united politically and economically,” Sheikh Abdullah added. “It is also proof that UAE remains committed toward local government to deal with effects of the global economic crisis.

So that was it. The foreign minister of the UAE announced to the world that “The economic crisis in Dubai is over”. Problem solved.

Really?

No, just problem postponed. But we’ll get to that later.

So what did Abu Dhabi get for this generous gesture? At the time the funding was deemed critical to preventing a broader crisis from engulfing the rest of the UAE and Gulf region as a whole. But it seems that Abu Dhabi also took this opportunity to create a power shift within the UAE.

On January 4, 2010 this became apparent with the grand opening ceremony of the world’s tallest building, the 2717-foot tall Burj Dubai tower. On that day, a name change for the tower was announced. Burj Dubai officially became Burj Khalifa.

In what maybe the biggest and most expensive name change in history, it suddenly became apparent that Dubai had paid a high price for the Abu Dhabi rescue.

A January 5, 2010 article in The Australian newspaper had this to say on the subject:

The humiliating announcement was made by Dubai’s own leader at the dazzling launch of the $1.5 billion Burj Dubai, which will now be known as Burj Khalifa in honour of Sheikh Khalifa bin Zayed bin Sultan al-Nahyan, President of the United Arab Emirates.

To really understand the significance of this name change you have to consider the following:

• Since its official construction start date of September 21, 2004 the tower was marketed to the world as the “Burj Dubai”.
• Throughout its sales phase the tower suites and properties were sold as the “Burj Dubai”.
• All road signs, maps and tourist signs identify the district in which the tower is located as “Downtown Burj Dubai”.
• Dubai’s futuristic transit system even identifies the towers location as “Downtown Burj Dubai”.
• All the signs and plaques on each of the 160 floors, its elevators, restaurants, nightclubs, lobby and grounds identify the building as “Burj Dubai”.
• All the security and employee uniforms reportedly say “Burj Dubai”.
• All the tourist souvenirs, t-shirts, caps and trinkets in Dubai as well as the towers gift shops were emblazoned with “Burj Dubai”.

The stunning 2,717-foot (828m) building boasts some impressive statistics.

• Tallest building in the world
• Tallest free-standing structure in the world
• Highest number of stories in the world
• Highest occupied floor in the world
• Highest outdoor observation deck in the world
• Elevator with the longest travel distance in the world
• Tallest service elevator in the world

It also has the world’s highest swimming pool, highest mosque and the highest outdoor observation deck on the 124th floor. The building even contains enough glass to cover 17 football fields.

The grand opening celebration created a welcome diversion from the doom and gloom of Dubai’s mounting problems and was to be a symbol of Dubai’s emergence from the economic slowdown. The spectacle was done in true Dubai fashion with light shows and a fireworks show with 10,000 fireworks that was said to be the worlds highest.

The Burj Khalifa was meant to be a glowing signature piece to Dubai’s rise from the desert. It was to be the crowing jewel in a $20 billion development that highlighted Dubai’s wealth and its prosperity. But instead it has become a testament to Dubai’s unbridled excess and architectural vacancy of the lots and buildings below it.

SWA Group a world design leader in landscape architecture was the firm chosen to design the 27 acres parks and grounds around the Burj Khalifa skyscraper. The design is lush and green with both grass and trees surrounded by plentiful water in lakes and fountains as you can see in the graphic below.

John Wong of SWA recently described the design in a January 10, 2010 San Francisco Chronicle article:

Dubai is hot and sandy, everything’s brown, so we want to be green and cool with lots of shade.

And the only thing that can turn a brown desert into a lush and green tropical oasis is water and plenty of it.

In a country where the cost of water is higher than the cost of oil, 97% of Dubai’s water is sourced from high cost desalination plants. Figures from the Dubai Electricity Water Authority (DEWA) indicate that 60 per cent of 2008’s water consumption came from the residential sector and 2009 figures were higher due to increased construction activity.

Water is both precious and costly in Dubai. It appears that the Burj Khalifa tower can also add this statistic to its list. The Burj Khalifa’s water system will supply an average of about 946,000 litres of water per day. It appears to be an incredibly thirsty building.

According to a January 10, 2010 guarian.co.uk article:

The Burj Khalifa’s air-conditioning system is said to be the equivalent of melting 12,500 tons of ice a day, in a city that has the world’s highest per capita carbon footprint. Dubai relies heavily on CO2-emitting desalination plants.

The Tiger Woods golf course alone requires 4m gallons of water a day. Short-term profits have repeatedly been put before sustainability.

How long can Dubai sustain this type of development? How many water desalination plants can they keep building and at what cost? At what point do they stop watering all the underutilized high priced greenery?

The news for Dubai real estate just seems to be getting worse by the day and every month Dubai seems to offer up a new surprise announcement.

• November 25, 2009 gave us Dubai’s announcement of a six-month suspension of debt repayments and the threat of a possible default.
• December 14, 2009 brought us the Adu Dhabi $10 billion rescue package and the UAE government announcement that “the economic crisis in Dubai is over”.
• January 5, 2010 gave us the stunning name change during the grand opening ceremony of the world’s tallest skyscraper in Dubai from the “Burj Dubai” to the “Burj Khalifa.”

So what happened next? Well, yes yet another surprise. But maybe we shouldn’t be surprised at all.

On January 18, 2010 a Dubai government official made another stunning announcement that was published in the Wall Street Journal:

A Dubai government spokeswoman said Monday that a $10-billion bailout from oil-rich Abu Dhabi, announced in December, is half the size that the government initially announced.

So the $10 billion Abu Dhabi rescue package turned into $5 billion overnight! What? Suddenly the economic crisis in Dubai that the Government earlier announced to be over, was NOT over. The problem was back.

Should we be surprised? No not from Dubai, a country in which the Government is clearly only interested in positive spin.

To make matters worse, “Fractional Ownership” became a popular purchase alternative in Dubai’s ultra hot real estate market boom times.

JP Grobbelaar, director of research and advisory for real estate consultancy firm Colliers International in Dubai had this to say about Dubai’s future prospects in an ABC News article on February 3, 2010:

“There’s just not enough people to occupy the space,” he said.

Compounding the problem is that many new buildings in Dubai are owned by multiple investors rather than a single owner, making upkeep of communal facilities like elevators and air conditioning a far greater challenge, Maclean said.

He said the property company has received “zero demand” from prospective tenants for those type of buildings, which comprise the bulk of the new space expected to come on the market in the coming years. Unless local laws are changed to force owners to pool their resources, those towers will remain mostly empty, he predicted.

The cost of maintaining the Dubai facade can be measured in more than just water; it may soon be measured in empty buildings.

The Dubai real estate market has a long road ahead of it. There seem to be new surprises around every corner. The lack of Government transparency and environmental sustainability will be very detrimental to any property market recovery in Dubai for years to come.

The continued silence of the Dubai’s Government regarding the UAE bailout package and the lack of clarity on its restructuring plan is only making matters worse. If things are not handled properly, Dubai maybe looking forward to its own version of Japan’s “Lost Decade”.