Dubai is buzzing. Traffic levels are back to what they were pre-2008, before the global financial crisis hit, and residential rentals are creeping up again. Both are signs that the emirate is recovering and doing what it does best – attracting investors into its key sectors, namely tourism and hospitality, trade and logistics, and financial services. Recent figures from the Dubai Statistics Department appear to confirm this; they show real GDP growth of 4.1% in the first half of 2012, the strongest half-year growth since the first half of 2008.
Up until 2008, the real estate sector was one of the key drivers of Dubai’s economy, but it was hard hit by the global economic downturn. There are now signs, however, that the sector is starting to pick up. Meanwhile, other sectors – healthcare, education and renewable energy, in particular solar – are playing a greater role in the economy as Dubai targets economic diversification.
“Dubai is getting back to what it does best: [being a] commercial trading hub,” says Chris Williams, a Dubai-based partner at legal firm Bracewell & Guiliani. He adds that the emirate's “buzz and vibrancy is coming back”.
Tourism is the largest earner for Dubai’s economy, contributing 31% to the emirate’s GDP in 2011. Although Dubai’s hotel market was affected by the global recession – with a drop in rates and occupancy of about 40% and 70%, respectively – it still fared better than many other tourism-dependent locations and, despite global economic depression and social and political unrest across much of the Middle East and north Africa (MENA), Dubai's tourism industry has remained strong.
According to John Podaras, director of MENA at Dubai-based hospitality consultant Christie & Co, Dubai has been a net beneficiary of the political unrest across the Middle East. Mr Podaras does add, however, that such volatility does raise the risk premium of investing in Dubai, which can act as a barrier to entry and foreign investment.
Creating an image
Dubai has spent much of the past two decades positioning itself as a commercial and tourism hub, selling the idea of what it has called 'brand Dubai' to the rest of the world. The success of the 'brand Dubai' strategy is the result of a number of initiatives, says Mr Podaras. These include a collaboration between Emirates Airline and the Department of Civil Aviation, the promotional work of Dubai Department of Tourism and Commerce Marketing and its network of offices, and the work of the Dubai convention bureaux and the Dubai World Trade Centre in establishing Dubai as an attractive meetings, incentives, conferences and exhibitions destination.
There have also been initiatives to develop the emirate's infrastructure, which have included building the world's tallest building, the Burj Khalifa, and the world's largest shopping centre, the Dubai Mall. Meanwhile, the emirate is improving its viability on the global stage by holding international sports events, such as cricket matches and golf tournaments. This has all contributed to creating an image of Dubai as a modern and secure city where Western culture is tolerated. Mr Podaras says that Dubai has become an “aspirational destination”.
“The underlying strength of Dubai is the fact that it is a neutral marketplace for countries where commerce cannot easily take place, such as Iran, Pakistan and India, and many of these countries were not affected by the financial meltdown in 2008 and 2009,” says Mr Podaras. Dubai has also been successful in tapping new markets such as China, eastern Europe and the Asian subcontinent, and moving away from traditional ones such as Europe.
Growth in the hotel industry of between 5% and 7% is predicted for the next three years, and if Dubai wins its bid to host Expo 2020 – a global exposition held every five years – this will increase demand in this sector even further. Indeed, the government’s belief in Dubai’s status as a tourist destination is so bullish that it has just announced plans to build another major tourist development, Mohammed bin Rashid City. This will comprise a gigantic 'mall of the world', 100 hotels, a 1.85-square-kilometre park and an international family attraction in collaboration with US-based filmmaker Universal Studios.
At the centre of things
Another important industry for the emirate is the logistics sector, a mainstay of Dubai’s economy that is expected to drive GDP growth in 2012. Transport, storage and communication represented 14% of Dubai’s GDP in 2011, according to Dubai Statistics Centre. A recent study by the Supply Chain and Logistics Group, a non-profit organisation established to promote the supply chain and logistics sector, reports that 14% of the United Arab Emirates' GDP is attributed to supply chain and logistics.
Dubai’s geographical location, with its solid connectivity to the high-growth economies of south and east Asia, Africa and Latin America, is, arguably, its greatest asset. The connectivity provided by Emirates Airlines, Jebel Ali Port and the aerotropolis Dubai World Central has created a sound business environment with a strong logistics infrastructure that has enabled Dubai to compete globally, according to the CEO of Dubai FDI, Fahad Al Gergawi.
These factors, along with the continuous reform of Dubai’s rules and regulations, have “allowed Dubai to survive the recession and be in an advantageous position when the global economy started stabilising”, says Mr Al Gergawi. Dubai handles 70% of annual air cargo in the Middle East and this dominance is expected to continue, according to Mr Al Gergawi. The International Air Transport Association forecasts that the UAE will be the sixth largest country in the world in terms of international freight, with a projected 2.75 million tonnes handled by 2014.
Jonathan Guyer, head of logistics and supply chain practice at Gray Business Consulting, says that there is ample opportunity for logistics companies in Dubai to expand, especially regionally. He describes Dubai as a springboard into rest of the Gulf Co-operation Council (GCC) and the eastern Mediterranean countries.
In Saudi Arabia, most fast-moving consumer goods companies still work through traditional agency channels, leaving much opportunity and scope for third-party logistics (3PL) companies to expand, especially those based in Dubai. “When implemented correctly, [3PL] can provide a very effective cost- and service-optimised distribution solution, allowing the principal to focus on the commercial aspects of his business,” says Mr Guyer.
Where the money is
The Dubai International Financial Centre (DIFC), a financial free zone, is home to more than 930 companies, of which 330 are financial services companies with a combined workforce of 13,000 financial professionals. Over the past seven years, Dubai's financial services sector has witnessed unprecedented growth, making it the undisputed business capital of the region, says Hamed Ali, CEO of Nasdaq Dubai, the emirate’s international stock exchange.
Dubai has benefited from being in a time zone strategically located between East and West, as well as from establishing “best practices”, says Mr Ali. He believes that as other jurisdictions around the region face their own challenges, “Dubai is a natural destination” for a company to set up an operation.
Others agree. “Dubai is already in a strong position and is very important to the whole Gulf region,” says Francesco Pavoni, a senior partner and head of GCC and Turkey financial services at consultancy firm Roland Berger. “Most of the players are already at the forefront of innovations and developments – 75% of Fortune 500 companies have established their regional headquarters in the UAE."
Dubai’s sound regulatory framework is one of the principal factors driving confidence in the sector. The combined action of regulators strengthening the financial system and making it more stable and resilient, as well as complying to global standards such as Basel III, will not only reinforce the sector’s credibility but will help to improve it, says Mr Pavoni.
All the major financial services players are already present in Dubai, he adds, though he does think there are opportunities for other entrants with, for example, value-added services for the front office, private banking or asset management services.
Similarly, Marco Rodrigues, an associate with Bracewell & Giuliani's banking and finance practice in Dubai, says: “There is an upswing in financial services. For the right project and the right geography, funds are available."
The DIFC has been instrumental in driving financial services, according to Mr Rodrigues. “It has given additional credibility to Dubai, to the UAE and to the region. It has brought international lenders to the table,” he says. While other jurisdictions in the region, such as Qatar, are trying to emulate Dubai’s model, Mr Rodrigues says that "the DIFC is head and shoulders above”.
Paul Maco, partner at Bracewell & Giuliani and member of the advisory board of the Emirates Securities and Commodities Authority (ESCA), cites the importance of a strong regulatory framework in positioning Dubai as a financial services hub. ESCA has introduced regulation governing mutual funds and as well as short selling and market making, he says, adding: “Regulatory sophistication will encourage brokers, intermediaries and investors to come to the emirates and has the potential to help increase liquidity."
There are a number of other sectors driving Dubai’s growth, including healthcare, education and the solar energy sector, with the latter also having the capacity to significantly alter Dubai’s energy mix.
In January 2012, Dubai established the Sheikh Mohammed Bin Rashid Solar Park, the first utility-scale production capacity park of its kind in the region. It will use solar radiations that are available all year round to produce electricity, using the latest technology available in international markets. Vahid Fotuhi, president of the Emirates Solar Industry Association, which is headquartered in Dubai, says that the park’s “clear structure and framework distinguishes it from other markets in MENA, which have been less clear or convincing with their solar maps". Investors are clear on what opportunities lie ahead in the next 20 years, he says.
However, “for the sector to grow there needs to be a steady pipeline of projects. The potential is there,” adds Mr Fotuhi, who goes on to say that in parts of Saudi Arabia alone, energy demand is growing by 11% to 12% annually.
Dubai has also embarked on a plan to install one gigawatt of solar capacity and has already started an initial project of 10 megawatts. According to Mr Fotuhi, Dubai is also more motivated than Abu Dhabi to push ahead with its solar agenda, given that it currently imports 99% of its fuel. But, to ensure future growth, it needs government backing. “Policymakers need to introduce a firm and bankable framework for a sustained and long-term solar project deployment programme," he says.