Dubai: Boom or Doom

From Travel Weekly, 9 June '09
A long, but very interesting article reviewing the indicators for imminent doom or future recovery in Dubai.
Re the reference to hotel prices, a current visitor is staying at one of the beach high end hotels for AED1200 p.n where last year he was paying AED3200p.n. I regularly receive flyers for Summer Specials including this year, the Atlantis which is now actually affordable for the first time. A couple of the business hotels in Old Town are now under AED400 p.n.
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Depending on whose claims you believe, this luxury mecca, the world's most ambitious playground, is either teetering on financial disaster or poised to dominate leisure and business travel in the Middle East for decades to come.

Dubai has always had its share of contradictions, not least of which was its transformation from an obscure, relatively oil-poor desert country into a high-end beach destination and commerce center built on the themes of first, biggest and best.

But as the global economic meltdown has made its way to this once seemingly unstoppable boomtown, the country is grappling with a new set of contradictions -- or at least contradictory scenarios about how the country is faring in the face of a global drop-off in ultraluxury and business travel.

According to widespread media reports, Dubai pinned a large part of its economy around both of those markets and has now become a symbol of excess run amok, with the government and developers teetering on the edge of massive defaults.

A New York Times article earlier this year cited reports that parking lots at the city's modern new airport were clogged with cars that had been abandoned by expats fleeing the country after losing their jobs and their visas.

Privately, some local business officials say Dubai is broke and that sister emirate Abu Dhabi is bailing it out to protect the United Arab Emirates as a whole and the region's reputation. But government, hotel and airline executives here insist that the gossip and foreign media reports are grossly exaggerated.

Yes, the economy and business travel have slowed, they say, and some projects have been delayed. But Dubai, they insist, is doing just fine, thank you very much.

"Total nonsense," Gerald Lawless, executive chairman of Jumeirah Hotels, said of reports of Dubai's demise. "It really is wrong." Lawless noted that occupancy at the company's beach hotels was 97% in April; however, that was on an average rate of $578, down almost 22% from $739 in the same month last year.

Dubai's skyline is still dotted by seemingly endless construction cranes. But they no longer run 24 hours a day like many did at the height of the recent construction boom. In fact, many are not running at all, and sentences here often begin with "Before the credit crisis ..."

Projects that have already been announced will continue, insists Dubai's commerce and tourism spokesman, Eyad Ali Abdul Rahman. Many in the planning stages, however, may at a minimum be postponed.

"Only about 2.5% of projects have actually been canceled," said Nigel Page, senior vice president of commercial operations for the Americas for Emirates Airlines. "Virtually all projects that have started construction will be built."

Moreover, despite the fact that the economic crisis has taken a particularly large toll on some of Dubai's key tourism bases, such as Britain and Russia, Dubai's Department of Tourism and Commerce Marketing says the number of visitors, which hit 7.5 million for all of 2008, is up 5% so far this year, while the number of visitors staying in hotels is up 7.5%.

The Russians, for example, "haven't stopped coming," said a tour guide with Arabian Adventures, an arm of Emirates Airlines that organizes excursions such as desert dinners and four-wheel-drive trips through sand dunes. "They just don't come in private jets anymore. They fly first class, and they don't get the Royal Suite, they just get a suite."

Fortunately for visitors, those suites are lot cheaper. The city's notoriously astronomical hotel rates are down as much as 60% in some cases. Yet they remain among the highest in the world.

"Some would argue that room rates going down are a good thing," Page said. "It really makes Dubai much more competitive."

Beaches still popular

Even Lawless, whose beach hotels once commanded some of the highest prices in the world, agrees the rate reductions aren't all bad.

"There is a pent-up demand for Dubai," he said. "Now it's accessible in terms of affordability."

He said rates were already in the process of correcting themselves as new hotels came on line last year. The number of hotel rooms in Dubai increased from 32,000 in 2007 to 40,864 in the first quarter of this year, according to the DTCM. Another 5,000 to 6,000 rooms are expected to come on line this year.

When the depth of the credit crisis and its global impact on hotels and tourism started to become fully apparent last year, it first seemed that Dubai and the rest of the Middle East might be spared.

Although the first cracks began to appear in September, the numbers improved again until December, when occupancy fell 16.5%, to 65.9%, rates fell 9.4% and revenue per available room dropped 24.3%, according to STR Global, a global alliance of Smith Travel Research.

In May, STR said, "Dubai has suffered dramatically compared with the Middle East region as a result of the recent economic crisis." Compared with the same period last year, RevPAR through March declined 35.9% in Dubai, driven mainly by drops in average daily rate, while the RevPAR decline for the entire region was only 13%.

"It's all variations on the theme of 'in the toilet,'?" said James Chappell, managing director of London-based STR Global. "Still, certain things need to be taken into account. One is that you are dropping from a very, very high base. Yes, it's bad, but average rates and RevPAR are still better than any city in Europe. ... It could be a lot worse."

Occupancy, he said, is still above 70%, which is considered healthy. And Dubai's rates are still the highest in the world, Chappell said, averaging $280. That contrasts with average rates in the U.S. that have been hovering just below $100. Only Russia had higher rates before the global economic meltdown, Chappell said, because it has such limited hotel supply.

Occupancies have rebounded in Dubai's leisure hotels, in part because of aggressive efforts by the government and air and hotel companies.

"We have planned for the crisis; we have a strategy," Rahman said, noting that the DTCM has 18 offices around the world.

As part of that strategy, the DTCM, along with Emirates Airlines and Jumeirah, has launched the "Keep Discovering Dubai" campaign, which includes hosting hundreds of journalists from around the world on three-day trips to the Emirates, aggressive advertising across Europe and packages promoted to consumers that include free and discounted hotel stays and airport transfers.

"People who are thinking about coming to Dubai are scared about their money," Rahman said. "So we are providing added value, things like children stay free. This is one of the things that will let us help them come to Dubai."

The country is also aggressively courting both tourist and meetings business from places such as China, whose economy remains strong, he said.

It was clear on a recent visit to the country that tourists are indeed still coming. Dubai's airport terminal, though big and modern, was packed. A chair could hardly be found in Emirates' sprawling business-class lounge. And negotiating the crowded gate and duty-free-shop areas was like trying to navigate a New York subway terminal at rush hour.

At the country's newest megaresort, Atlantis, which was built as a gateway from the Persian Gulf to the man-made Palm Island, the lobby, pools and aquarium areas were busy on a recent weekday, and resort officials said occupancies were in the mid-70s.

Business hotels, however, have taken a bigger hit than the beach resorts. On a recent weekday, a hotel worker at the Jumeirah Emirates Towers, across the street from the country's financial center, said that occupancy was just 48%.

Lawless, however, said he is seeing signs that "our exhibition and conference business is slowly coming back." The bulk of the county's tourism is from Europe.

The modern city also attracts a number of shoppers and tourists from places like Saudi Arabia. Last year, only 465,000 of the 7.5 million visitors to Dubai were Americans, and most of those were business travelers. Still, the DTCM, which has an office in New York, said it hopes to open a second, West Coast office to increase tourism from the U.S.

Emirates Airlines now has nonstop flights from New York, Los Angles, San Francisco and Houston, and it is eyeing service from Chicago.

Economy

Dubai is the second largest of the seven Emirates that make up the United Arab Emirates. Although its economy was built on the back of the oil industry, Abu Dhabi has the bulk of the Emirates oil. Petrodollars account for only about 3% of Dubai's gross domestic product, and it's estimated that the wells will be dry in 15 to 20 years.

Dubai Prime Minister Mohammed Bin Rashid al-Maktoum developed the country's grand vision to transform itself from a regional port into an extraordinary tourist destination and the most important city between Europe and Asia.

As part of that plan, the country has developed the famed man-made Palm Islands as well as "The World," a group of private islands that resemble a map of the world. Two other Palm Islands are also under development. Dubai is also home to the iconic, sail-shaped Burj al-Arab hotel, built just off the beach on the country's first man-made island.

But the theme that drives Dubai's development is "biggest and best."

Consider:
- Set to open in September is the Burj Dubai, the tallest building in world.
- The just-opened Dubai Mall is the largest in the world.
- The Mall of the Emirates houses the world's largest indoor ski hill.
- Dubai Land, which is still in the early stages of development, will be bigger than Disney World.
- The fountains outside the Dubai Mall and new Address Hotel shoot higher than those at the Bellagio.
- Near the port is the world's largest aluminum plant.

With much of the development being led by entities of an opaque government, it is difficult to determine, though, exactly how Dubai and its economy are weathering the economic crisis and the crash of its real estate market.

Page recalled that on a recent weekend he could hardly find a parking spot at one of the country's famed shopping malls. "So is the economy doing badly? It is down a bit, but I don't think it is doing that badly," he said.

Still, questions about Dubai's economic future and its plans for dealing with the crash of its real estate market were renewed last month when the country's finance minister was abruptly fired. Nasser al-Sheik was overseeing the administration of a $20 billion bond program launched by Dubai and purchased by the U.A.E.'s central bank to ease liquidity problems at a number of government-related entities, including developer Nakheel.

According to the Financial Times, the emirate has said it has about $80 billion in outstanding debt, and Nakheel, the development arm of the government that is building its World and Palm islands, is one of the main recipients of the bank bailout.

In addition to developments around Dubai, the government, through Dubai World, is a 50-50 partner in MGM Mirage's $8.5 billion Las Vegas CityCenter, which has struggled to meet its debt obligations.

Arthur de Haast, CEO of Jones Lang LaSalle Hotels, said it was hard to know exactly what was happening in the region, but he expected it to survive the real estate downturn.

"In the Middle East, at the end of the day, much of the development is driven by government-related entities," he said. "Even those that are so-called nongovernment are major families that are operating out there. They are all closely linked. It is a pretty tight-knit community, and the reality is you've already seen a big bond issue largely underwritten by Abu Dhabi. I think that Dubai itself may be under pressure, but there is sufficient liquidity within the U.A.E. as a whole to sufficiently manage the situation."

In an interview podcast available on Emirates Airlines, Mohammed bin Ali al-Abbar, director general of the Department of Economic Development and chairman of Emaar, which is developing the Burj Dubai and Dubai Mall, said the U.A.E. has taken necessary steps to protect the economy.

"The global situation is affecting everyone," al-Abbar said. "The good news in the Middle East is that the fix really starts from the banking system. The banking system in the Middle East is quite healthy. The banks have been regulated in a first-class manner."

Still, he said, consumer sentiment and "a little bit of tourism has been affected."

Asked if the recently opened Dubai Mall and the planned September opening of the Burj Dubai will be affected by bad timing, he said, "It depends on who you are dealing with. If you are dealing with a developer that has leveraged heavily ... then I think you would have a challenge. Thank God we are smart. We are lucky. We don't have that issue."

A lingering question, though, is how al-Maktoum's grand vision for Dubai might be blurred in the long term by the current crisis.

"In a year-and-a-half, two years, one year, as the world gets back on its feet, I think this development and the city of Dubai are ready to be at the front," al-Abbar said.

Chappell and de Haast agreed that the country's future, especially its tourism markets, remains rosy.

"I think demand will bounce back," de Haast said. "As a destination, one thing that Dubai is very good at is marketing itself extremely well."

Chappell said Dubai has "had a big shock" that will serve in some respects as a reality check.

"They had a big scare," he said. "But what's not to like? They are going to come back, and they are going to come back strong. ... They might be more selective in their projects, scale back some of the more ridiculous ones. But I think in many ways, as ridiculous as this sounds, this whole thing will have done them a huge favor."