Dubai is broke and will become a ghost town.
“Altogether, the Dubai government and its companies have more than $80 billion of debt. The emirate, which has a population of only two million, has been forced twice to approach its oil-rich neighbour in Abu Dhabi for the funds to bail it out.”
The Atlantis (!) hotel in Dubai
David Beckham and Brad Pitt are believed to be among the celebrities and sportsmen who bought villas in Palm Jumeirah in Dubai, a luxury development that juts out into the Gulf. But when the property bubble burst this year, residents saw the value of their investments collapse. Yesterday their situation worsened as Nakheel, the developer, and its state-owned parent made a request to suspend debt repayments.
The statement rocked credit mar-kets around the world and prompted analysts to question whether Dubai, the most populous of the United Arab Emirates, will be able to meet its obligations. The concern is that Nakheel will be unable to continue developing the Palm and neighbouring projects, leaving Dubai and its coastal waters an ugly, unfinished construction site.
When the 2,000 villas and townhouses on the Palm went on sale in 2002, they sold out in a month. Passing through en route to the World Cup in Japan and Korea were the England football team, and several players stopped off to sign up for £1 million properties on the artificial island, with Michael Owen, David James, Joe Cole, Andy Cole and Kieron Dyer, it was reported, joining Beckham on the beaches. Pitt and Angelina Jolie are also said to have bought homes.
Joe Cole was one of the few who got out in time. The Chelsea player sold his villa for about $3.5 million (£2.1 million) last summer as Dubai’s property bubble approached bursting point.
Nakheel is now in deep trouble and struggling to cover its debts. Dubai World, a government conglomerate that owns the developer, is $60 billion in the red. Yesterday’s announcement by the Dubai government that it wishes to suspend repayment of Dubai World’s debts for six months, including a $4 billion bond held by Nakheel that was due to be repaid next month, is the clearest indication that the emirate can no longer meet its obligations.
Work has stopped on several major projects around the city and companies have had to accept huge cuts in the value of their contracts. More than 400 projects worth more than $300 billion are said to have been cancelled or shut down as a result of the property collapse.
Recent reports claimed that British companies were owed £200 million by Dubai’s government-owned companies, but some analysts put the total figure much higher. “The bigger construction companies have to take it because if Dubai bounces back they want to pick up more work. Smaller companies have to take any money they can,” one local analyst said.
Thousands flocked to Dubai during the boom, enticed by the tax-free lifestyle. Many invested in property, expecting huge returns as the market soared. By 2007 villas were changing hands at prices 200 per cent higher than four years earlier, and rents skyrocketed as Dubai became intoxicated by a property boom echoed worldwide and by its sense of achieving the impossible.
When the Atlantis hotel was opened on Palm Jumeirah a year ago with a $20 million party headlined by Kylie Minogue, it was supposed to crown the island’s self-styled reputation as an Eighth Wonder of the World. It was also supposed to cement Dubai’s position as a new playground for the rich and famous. The $1 million firework display helped to distract attention from a construction boom running out of steam.
The Dubai government has done its best to deny that a problem exists, claiming recently that the population would rise this year by 400,000, flying in the face of all independent assessments, which predict a sharp fall. The anecdotal stories of cars abandoned at Dubai International airport with credit cards in the glove box have become the stuff of legend, and not the image that the government has sought to project.
Some parts of Dubai World remain strong, in particular DP World, the third-largest international ports operator, which bought P&O in 2006. DP World also owns ports in Britain such as Tilbury in Essex. But those parts of the business that were founded on the property boom, and Nakheel in particular, are likely to continue to struggle until the property market recovers and construction can begin again in earnest. Even then, bankers’ confidence in the business may be shot.
Altogether, the Dubai government and its companies have more than $80 billion of debt. The emirate, which has a population of only two million, has been forced twice to approach its oil-rich neighbour in Abu Dhabi for the funds to bail it out. The federal Government has approved $15 billion in bonds and more will have to follow if Dubai’s state-owned businesses are to survive until an economic recovery can take hold.
Hugh Tomlinson in Dubai
November 26, 2009
Source: The Times
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