The world’s tallest tower symbolises the excesses of the boom years, but can it help prompt recovery?
Since the plan to build the Burj Dubai was launched in 2003, the development has grown in tandem with the fortunes of the city after which it is named. In little more than six years, the 818-metre-tall tower has risen from an empty patch of desert on the outskirts of Dubai to become the world’s tallest building, at the centre of a modern city. But with developer Emaar Properties preparing to open the tower on 4 January, the Burj Dubai is now seen by many to embody the excesses of the boom years.
As with other towers that have held the record as the world’s tallest, such as New York’s Empire State Building in 1933 and Kuala Lumpur’s Petronas Towers in 1998, the grand opening of Burj Dubai comes during a severe economic downturn in the local market.
The immediate question for Emaar is whether it can fill the 61 floors of residential space, along with the 37 floors earmarked for offices and the 35 hotel floors. It has yet to reveal how much space has been sold. For the wider Dubai market, it adds to the risk of oversupply, which could dampen real estate prices for years to come.
From the outset, the project was a radical departure from Dubai’s previous high-rise projects. Unlike other towers designed to generate a profit on their own, the Burj Dubai is part of a much grander plan. The tower is designed to act as a focal point for development on the edge of the city’s existing business district. It is surrounded by the Downtown Burj Dubai development of homes, offices, hotels and shops, which includes Dubai Mall, one of the world’s largest shopping centres.
“The Burj Dubai never made sense financially if you think of it as one building,” says one consultant working on the project. “You need to look at what it does to property prices in the surrounding area to make the numbers stack up.”
In early 2004, the prequalification process began for the main construction deal, which was to be one of the region’s most hotly contested contracts. A consortium of South Korea’s Samsung Corporation, the local/Belgian Bel Hasa Six Construct and the local Arabtec Construction was awarded the contract in December 2004, beating bids from five rival groups.
With contractors on board, the site was the busiest in an emirate full of bustling construction projects, with 12,000 men working on the tower alone at its peak. There were setbacks during the construction phase, most notably the bankruptcy of Swiss cladding contractor Schmidlin in February 2006. But by the end of 2008, the Burj Dubai had become the world’s tallest building, about 60 per cent taller than Taiwan’s Taipei 101.
Burj Dubai in numbers
124 - Level with observation deck
61 - Total number of residential floors
37 - Number of office floors
18 - Number of floors taken up by Armani hotel, suites and residences
15 - Number of floors to house substations, water tanks and air-conditioning units
As it rose in height, the project became a symbol for Dubai and everything it has been trying to achieve in terms of building a modern city based around iconic property developments. It played a central role in an unprecedented five-year frenzy of activity for the construction industry, in which contractors built hundreds of tower blocks, hotels and shopping malls, reclaimed off-shore islands, and launched major new infrastructure schemes such as the Dubai Metro.
“We had never seen anything like it,” says one contractor who bid unsuccessfully for the project. “The [Burj Dubai] project captured the imagination [of the emirate] and was the catalyst for so many of the projects that followed.”
But unlike the boom years, when construction of the tower started, the Burj Dubai will now open to a badly bruised market in which the local real estate bubble has burst. Even compared with other property markets around the world that have been affected by the global recession, the pace and extent of the decline in Dubai has been dramatic.
According to the Global House Price Index released by UK-based property consultant Knight Frank in December 2009, property prices have fallen in Dubai more than anywhere else in the world. The firm reports that property values in the emirate fell by 47 per cent over the previous year, more than in any of the other 42 markets surveyed.
Alongside falling prices, the ambitions of developers have been scaled back and most have been reluctant to start construction work on new projects. According to regional projects tracker MEED Projects, only $6.4bn worth of construction contracts were awarded in Dubai in 2009, compared with $30.4bn worth in 2008 and $21.7bn worth in 2007.
Existing projects have also stalled as developers run out of cash because they can no longer generate revenues from sales. Even on the Burj Dubai project, Emaar had difficulties making payments to the contracting consortium on time in late 2008, and for a while the contractors considered the prospect of stopping work.
Emaar was not unusual in this. Across the emirate, developers were suffering from cash flow difficulties as sales dried up. The problems moved down the supply chain and, by the start of 2009, began to affect almost every supplier and contractor in the emirate. This has put tremendous strain on a sector that, according to ratings agency Standard & Poor’s, accounted for about 50 per cent of the emirate’s gross domestic product (GDP) at the end of 2008.
Companies have reacted by cutting costs and jobs, and Dubai now faces the prospect of a falling population this year, according to independent observers, although Dubai officials claim the population is still rising.
While job cuts and the prospect of a declining population are major issues for Dubai’s economy, the more immediate concern for investors is whether the loans given to Dubai’s government-linked companies will be repaid.
“The [Burj Dubai] project captured the imagination [of the emirate] and was the catalyst for so many of the projects that followed”
Unsuccessful bidder for Burj Dubai contract
Dubai has an estimated $150bn of debt, with about $60bn in bonds. In February 2009, the Central Bank of the UAE provided $10bn to help the emirate meet its financing needs, and a further $5bn was offered by two Abu Dhabi banks in late November.
Even so, there were widespread fears that property developer Nakheel would not be able to repay a $3.5bn sukuk (Islamic bond) that had been due on 14 December 2009. It was only a last-minute $10bn loan from the Abu Dhabi government that ensured there was no default.
The support from Abu Dhabi was what many in Dubai had been hoping for throughout 2009 and should, they hope, establish a base from which Dubai can recover. But even with the return of optimism generated by the support from its neighbour, Dubai’s economic prospects remain uncertain. In particular, as economic and population growth slows and developers finish more projects, there is likely to be a glut in the supply of real estate.
An estimated 50,000 new residential units will be delivered in 2010, in addition to the 30,000 units delivered in 2009, despite the likelihood of a drop in the size of the population.
But Dubai retains some advantages over other markets in the region. After five years of frantic building, it has the best infrastructure in the region. It has the GCC’s first metro system, the world’s sixth-busiest international airport, new highways and hundreds of apartment blocks, hotels and office buildings, and the biggest shopping malls and entertainment venues.
The changes in the supply and demand of real estate also mean that rents have become more affordable, which makes Dubai more competitive at a time when other cities in the Gulf are still experiencing rising rents.
“The market in 2010 from an end-user perspective will still see strong demand,” says Nicholas MacLean, managing director of US-headquartered property consultant CB Richard Ellis Middle East. “People coming into the Middle East to do business want to do it in Dubai. It is the gateway to the region.”
As the world’s tallest building, next to one of the world’s largest shopping malls, the Burj Dubai could yet act as a magnet for those doing business in the region. Developers elsewhere may be planning record-breaking towers, such as Kingdom Holding’s Kingdom Tower in Jeddah, but even if they go ahead, none will be completed within the next three years, meaning the Burj Dubai will have time to establish itself in the market before it is overtaken by any taller tower.
Despite the dominant position Dubai still enjoys, for many, the Burj Dubai will always be a reminder of the excesses of emirate’s real estate boom. But is also shows what can be achieved, and what the other cities around the region are missing.
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