Dubai Expo Presents Short-term Boost, But Longer Term Challenges

 

Dubai’s successful bid to host the 2020 World Expo, which is expecting 25m visitors to the 438-hectare site, should generate business activity and boost confidence across the Emirate’s infrastructure, real estate and hospitality sectors over the next few years, says Fitch Ratings, but there are also longer term risks of another property bubble. 

In an assessment by the Fitch Ratings department the surge in construction, new hotels and other developments associated with the 2020 World Expo in Dubai, UAE, has the potential to throw off the balance between supply and demand after the show, meaning treasurers and finance professionals need to carefully consider the risks against the real benefits of doing business in the growing Emirate.  

A big enough mismatch between supply and post-show demand would create the risk of another sharp drop in real estate prices as happened in the Dubai in 2008 when property values fell by more than 50% when the financial crisis hit, necessitating a rescue from neighbouring Emirate and UAE capital Abu Dhabi. This is the reason why the world’s tallest tower which was to be have been named the burj Dubai (tower of Dubai) was subsequently called burj Khalifa in recognition of the ruling family next door providing rescue funds; a subject much discussed among attendees at this year’s Sibos trade show held in Dubai.  

Prime real estate in the coastal city state has recovered strongly since the crash and some estimates suggest prices have risen by up to 30% in 2013 already. Other sectors, however, including residential projects in secondary desert-edge locations, have only had limited recovery and are likely to remain challenged in the medium term. If another bubble develops in the wake of the 2020 Expo the threat of devaluations in prime locations is a possibility, concludes Fitch.

On the up side, the Expo will drive major new construction and infrastructure upgrade projects, which will assist rents, real estate prices, tourist visits and business revenue in the run-up to and during the Expo event. Longer-term the upgrades could also fuel growth in Dubai’s already booming tourist sector, which already attracts millions of sun-seekers every year and has turned its airport into one of the busiest in the world. The Gulf region generally will benefit from this upsurge, adds Fitch, aided by the possibility of political stability in the Gulf improving as Iran is brought in from the cold by US diplomatic efforts and ‘Arab Spring’ protests dissipate. 

A well-managed 2020 World Expo could also attract more businesses to Dubai’s free enterprise low or no tax zones, which could create longer-term continuing business benefits. This has to be contrasted against the risk of the over-expansion of hotels, offices and retail spaces which could hit once the Expo is finished. No doubt the credit rating agency (CRA) will be monitoring the UAE’s construction firms and the many multinational corporations (MNCs) active in the region in the years ahead to see precisely what impact the huge project will have, but for now the CRA is hedging its bets. Investors in the region may also be advised to do so without sufficient non-infrastructure government guarantees, which yet arise, a thorough risk assessment has to be done.

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