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June 09, 2008

Dubai: If You Build It, Will They Come?

John Shoaf '10
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This post is part of a series following the “Pre-MBA World Tour,” organized by Shoaf and members of the class of 2010.

Dubai is clearly one of the fastest-growing cities in the world. Just compare a satellite image of five years ago with that of today. What was once a small desert city along the gulf coast is quickly becoming a large metropolis with miles of skyline and hundreds of man-made islands emerging from the Arabian Gulf.

What is most fascinating about this rapid growth is that it’s not based on slow economic progression. It’s based on the decision of a single ruler who has realized that the emirate’s oil reserves may be gone someday and he needs to diversify the framework of his economy . . . and quickly.

To understand what is happening in Dubai, simply take a blank sheet of paper and use your imagination to design a brand-new city that would rival any of the world’s largest — including New York, Los Angeles or London. And then, find a way to build it within 10 years.

In Sheikh Mohammed bin Rashid Al Maktoum’s design, he subdivided the city into several economic free zones intended to be the world’s hub for nearly every major industry. Some of these zones are designed for the services sector (e.g., Media City, Internet City, International Financial Center, etc.), while others are designed for education and liberal arts (Knowledge City, etc.).

Another important component of Sheikh Mohammed’s plan was to establish Dubai as the most visited tourist destination in the world. In order to attract tourists, he commissioned several iconic attractions (such as the World, the Palm Islands and the Burj Dubai) that would give tourism magnets such as the pyramids or the Eiffel Tower a run for their money.

Right now the population in Dubai is nearly 1.5 million (and it’s estimated that only 15 percent are actually Emirati citizens), and there are hotels and housing developments being built with an expectation for more rapid growth.

The obvious question is: If you build it, will they come?

Fortunately, much of this investment seems to be trickling down into every level of the emerging market economy, and everyone in the system seems to be making a lot of money. This new land of opportunity is creating such a huge demand for jobs and materials that it’s attracting top talent and capital investment from all around the world.

The other important component of this economic plan is that the large sovereign wealth funds and government agencies have two bottom lines: profit and GDP growth. From what we can tell from visiting with several of these organizations, Dubai is probably experiencing a real estate bubble, but it is still on a fast track to becoming one of the most fascinating and diverse cities in the world.

Next Stop: Mumbai

Photo Credit: .EVO.

Comments

by eupalinos | July 21, 2008 at 4:36 AM

Dubai is indeed fascinating... I am also puzzled by the sustainability of its purely investment driven expansion....and whether it will be successful in the long run... Of course, it also depends on how do you define success.... As I rationalize it, at first look it seems like an unlikely proposition... - small population and apart from the locals (a clear minority), no one else can get citizenship, thus no one can count this place as truly home - a sizeable part of the population are destitute migrant workers, with no real buying power on the local market (they ship back earnings and live in prison like compounds, usually on the building sites or other nice places). This source of cheap labor is melting too, as the economy of the Indian sub-continent develops.. Then the projects, - residential...the islands, etc...well, there is certainly enough aging rock stars, dotcom millionnaires and other high income individuals around to offload these properties...once they're sold it's not really the developers problem...then whether they stay empty or only used 1 week/year remains to be seen...(I suspect some rock stars may even forget they bought something there...) - the tourism resorts, etc...well Dubai did enjoy a "flavor of the month" status lately, mainly for British tourists and there is certainly a potential for quick charter tours from Europe and from other capitals of the middle east...but whether it becomes a long-term tourist destinaiton...maybe it will...prices are now edging up... ..office spaces...well, usually a good ratio is about 20 m2/employees...so for each millions sq m of office you should have 50 000 employees...I do not really see the population bassin for this...(not like in Mumbai, Shanghai etc)... ..creating a services /knowledge hub in the middle east...possibly a good card...but here, all the other emirates are copying fast and every one is doing a similar initiative...new stock exchange, new universties in co-op with famous ones in the US or Europe, new airport, etc...so the effect may well be very diluted... At the end of the day, it will probably be successful in some measure...it will boost the city from 30 000 people to 4 millions...but the return on the pumped in 100 billions $ will probably be negative...but then again, they do not really have a cost of capital to talk of... and if you compare how others (the US military for ex) are burning 100's of Billions in the extended region without any expected return on capital...then the Dubai experiment maybe is not too bad!

by Jim McCarthy | August 22, 2008 at 12:11 PM

Morgan Stanley recently issued a report predicting an oversupply in Dubai and the Gulf in general. Stock of larger developers such as Emaar have also been taking a hit - http://jamesoncapitalllc.net/gulp-in-the-gulf/. Dubai does have the problem that it isn't a major oil or gas producer and so has to develop an alternative economic base.

by TAYYAB RASHID | October 08, 2008 at 4:08 AM

1. Interesting/ Only two comments in so many months. Both of them, negative. 2. Not much insight for someone who is looking to invest in dub. The writeup or the comments dont take any position. Probably hard to do reg dubai as there is very little real info available on/in this country. Most of it is speculation. 3. The Dubai market is also being driven by the capital fleeing unstable countries in this region. 4. That Dubai needs to compliment its brick and mortar with soft knowledge based initiatives is obvious. The question is, can it attract the brain. 5. Most of the local crporates are small time, filled with labanese and egyptian labor. The chinese, indian, or pakistan brain for example is not queing up to land in dub. Its mostly cheap labor that wants to get in. 6. Naturally, we wish Dub all the best. People who have invested millions in this country, can someday find rules changing and there are no long term guarantees. Rules in Dub change at the whim. Love t

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