Dubai enters 2008 after a year of significant economic growth, continued expansion of its economy and the increasing transparency of its challenges.
Nominal GDP exceeded 16% for 2007, according to the ministry of economy, beating International Monetary Fund (IMF) projections. While the IMF had anticipated a GDP of 679.1bn AED ($185bn), the ministry said it expects it to have reached 698bn AED ($190bn). Growth was driven equally through soaring oil prices and higher than expected expansion of the non-oil sector.
Dubai continues to be the envy of the Gulf in its ability to expand its non-oil sectors. The ministry of economy has reported that non-oil growth in the United Arab Emirates (UAE) has risen to 455bn AED ($124bn), a 21% increase over the previous year. As such, non-oil sectors such as finance, real estate, tourism and hospitality, now make up some 65% of the GDP.
Further strengthening of the financial sector was achieved when Dubai Ports World floated 20% of its shares on the Dubai Financial Exchange between November 4 and 15, in what was believed to be the largest initial public offering (IPO) in the region to date. This gave the exchange a significant boost, as it was the first time a major domestic company had chosen to list on the exchange. Many financial professionals view the listing as a test for other state-owned companies considering IPOs.
On the banking front, Emirates Bank International and National Bank of Dubai (NBD) announced on July 2 that they had agreed to merge, signalling the possibility of further consolidation in Dubai's growing banking sector and creating the region's largest lender, in terms of assets, Emirates NBD.
Financial services are one of the many sectors driving Dubai's growth in 2007. Total investment in the UAE, driven in large part by the private sector, is expected to have risen to 144bn AED ($39.2m), at a growth rate of 19%.
An IMF country focus report for the UAE, published in December, said Dubai's "challenge now is to address the housing constraint that is pushing up inflation while sustaining growth and ensuring macroeconomic and financial stability". Increasing rental costs are a primary catalyst of the climbing inflation rate and in response, the government has announced plans to implement a series of measures to curb soaring rents in the residential and business sector, which include restricting rental increases and expediting completion dates of new housing projects.
In the last week of 2007, the government lowered its rent cap from 7% to 5% although adherence to this is questionable at best as rental prices continue to skyrocket and demand for property outstrips supply.
On the commercial end, rental rates for office space in Dubai have tripled rising from 90 AED ($24.50) per square foot in 2005 to 280 AED ($76) today according to a report by local property consultant Asteco. Occupancy rates are currently around 98%, and new office space is being bought as soon as it comes to market. Construction delays are blamed for the current distortion between supply and demand.
Dubai has built a reputation for exclusivity and high-end appeal in the real estate sector. Profit margins on the emirate's high-end property projects have been significant in the past year. According to Barmak Besharaty, managing director of Dubai-based financial services company Almas Capital, "Luxury high-rise towers are being way over-built right now. There are only so many high net worth foreigners who can afford this type of real estate."
With so many projects defined as the 'ultimate luxury,' industry professionals are beginning to see market saturation. However, Wazir Daredia, executive director and CEO of Dubai's Trident International Holdings, told OBG, "There will always be a market for luxury real estate."
Still, while there is no shortage of real estate development projects under construction, there remains a lack of middle-income housing. According to Mark Prior, regional managing director at the property-consulting firm EC Harris, "there is plenty of money to be made in affordable housing".
In other real estate news, the government announced plans on June 16 to establish the Dubai Real Estate Corporation (DREC) to provide a database of the state's land and property assets, which represents 30% of all commercial property in the emirate. The corporation is expected to be in a position to free up unused land for commercial development and thus encourage foreign investment in public sector real estate by the private sector.
A different aspect on the development front is the government's announced plan for Dubai to become an environmentally friendly city that would use up to 60% less energy than conventional cities. Energy efficiency is to be achieved through a federal government mandate that will require new buildings in the emirate to be constructed in compliance with strict environmental standards.
In transportation news, the Road and Transport Authority announced it would build a third metro line to connect the Dubai International Airport with the Jebal Ali airport. Construction is expected to begin in March 2009 with service planned to start in December 2012.
The past year was one of positive economic indicators and increased activity across all sectors, although continuing shortages in commercial and residential space are starting to add serious constraints to the economy and increasing inflationary pressures.