Dubai’s economy recovers after the pandemic… Russian demand for real estate a significant support

Dubai accelerates efforts to attract residents, investors, and capital to stimulate long-term growth, supported by a rapid economic recovery achieved after the pandemic. It is betting that it can avoid debt crises that previously tempered its global ambitions.

The emirate seeks to reutilize a shining economic model that has focused for decades on real estate investment, tourism, and inflows of foreign capital.

The real estate sector has once again flourished, aided by strong Russian demand amid the Ukrainian crisis and eased residency regulations. Analysts believe this time there are more protective measures in place to face any recurrence of the issues that impacted Dubai after the global financial crisis in 2008.

Dubai, home to the world’s tallest skyscraper and artificial islands, aims to achieve ambitious new goals. Its 10-year economic plan known as “Dubai 33” aims to double the economy’s size and make Dubai one of the world’s top four financial centers within a decade.

Dubai also aims to increase its public beaches’ length to 105 kilometers from 21 kilometers by 2040 and revive the halted Jumeirah Palm project after the global financial crisis in 2008.

Tourist numbers almost returned to 2019 levels in 2023, and a study by Knight Frank found that Dubai was ranked fourth globally last year in the most sought-after real estate markets, with 219 sales of homes exceeding $10 million.

However, the simultaneous increase in property prices and demand for ultra-luxury units raises concerns about excessive increases that occurred in the past.

In 2008, Dubai was severely affected during the global financial crisis, leading to the outflow of capital and residents, collapsing property prices, and major government-affiliated companies facing significant challenges in debt repayment.

In the end, Abu Dhabi, the capital of the UAE, intervened and provided Dubai with a lifeline by offering $20 billion, largely expected to extend the repayment term for the third time.

Nasser al-Sheikh, the former Director-General of the Dubai Department of Finance, who held the position until 2009, told Reuters, ‘There is a risk that Dubai may become an excessively expensive place to live, and therefore new projects need to ensure an abundance of supply to meet the demand for suitable properties for middle-income individuals with an increasing population.’

He added, ‘If private real estate developers cannot provide that, the government and its affiliated entities can play a bigger role in achieving this and keeping prices reasonable,’ referring to major companies that have driven significant growth in Dubai’s economy.

Dubai’s population exceeded 3.55 million in 2022, according to official statistics, representing a 2.1% increase from 2021 and a 4% increase since 2020. Standard and Poor’s expects the population to surpass four million by 2026.

Justin Alexander, the Gulf Economics Director and Gulf Analyst at Global Source Partners, said, ‘There is always a risk associated with a new large round of borrowing (conducted by government-affiliated entities) based on unrealistic expectations about real estate sales, but I hope that learning from previous cycles will mitigate the impact of this risk.’

The Dubai government’s media office has not yet responded to a request for comment on how the emirate’s strategy works to ensure that growth is sustainable and not speculative.

Dubai established a Public Debt Management Office in 2022, restructured some outstanding debts, and announced plans to list government stakes in 10 companies to raise capital and support financial markets. Dubai has already listed four of them last year.

Al-Sheikh said that current financial officials have learned from experiences of the past 15 years, adding, Dubai has a strategy today, and developing financial markets is an important component of Dubai’s comprehensive financial proposal, not just to provide liquidity and debt repayment but also to solidify capital markets in the financial sector.

Dubai, the commercial hub of the UAE, has injected resources into social reforms, business reforms, and sectors such as digital technology. Oil revenues constitute less than 2 percent of the gross domestic product, unlike the financially rich capital, Abu Dhabi.

CBRE, the real estate research company, reported that the average property prices rose by 12.8 percent in the first quarter, with villa prices increasing by up to 15 percent, surpassing sales levels recorded in 2014. Buyers from Russia ranked third among the top 10 nationalities for property purchases, following India and the UK.

Richard Waind, CEO of Peterhorns in the Emirates, said, ‘Dubai has really positioned itself as a global safe haven,’ adding that it is safe for families and politically and financially stable. He continued, ‘It is no longer a speculative market; it is a market built on real investment. I think that makes a big difference from what we saw in 2008 and 2009 and perhaps the last peak in 2014.

Standard & Poor’s estimates indicate that Dubai’s total government debt will decrease to 51 percent of the gross domestic product, reaching $66 billion by the end of 2023, down from 78 percent of the gross domestic product in 2020. However, the broader public sector debt will remain high at around 100 percent of the gross domestic product due to commitments to non-financial entities associated with the government.

Credit default swaps for Dubai for a 5-year term reached an unprecedented low of 66 basis points on March 8 this year, significantly lower than the highest level reached at 316 during the peak of the pandemic in 2020. Credit default swaps are used to hedge against a government’s or company’s failure to repay its debt.

A report published by the Financial Times this month on foreign direct investment markets in 2022 indicated that Dubai attracted approximately $12.8 billion in foreign direct investment capital.