Defaulty towers

Following Abu Dhabi's $10 billion bailout in December, Sian Hickson reports on developments in Dubai

At 818 metres, the glittering needle of the Burj Khalifa rises high into the blue skies of the Gulf, dwarfing both its nearest neighbours and every other man-made edifice on the planet. Built by Emaar Properties at an estimated cost of $1.8 billion, it was supposed to be the crowning glory of Sheikh Mohammed bin Rashid Al Maktoum's extraordinary empire of excess, which has sprung in a little over a decade from out of the desert sands, transforming this formerly modest port city into a international centre of business and enterprise.

Construction of the Burj Khalifa (from the Arabic word for tower) commenced in September 2004. Such prestige projects are often built in boom times when it seems that the only way is up, but it is interesting to note that several of the Burj Khalifa's lofty predecessors have reached completion just as the glory days they were supposed to crown came spectacularly to a close.

The Chrysler Building was completed in 1929, just in time to give its first visitors a bird's eye view of the Wall St Crash. London's Nat West Tower and the World Trade Centre both opened their doors in 1974, the year that subsequently delivered the worst post-war stock market crash in history. The Dubai government will doubtless be hoping that the opening of this latest prestige project - timed to coincide with the fourth anniversary of the accession of Sheikh Mohammed - will have the rather different effect of renewing Dubai's standing as a global hub of business after a turbulent few months.

In November, Nakheel, a prominent construction company famous for the creation of the Palm Island resorts, announced that it would be requesting a delay of six months on the repayment of scheduled loans. The company is a subsidiary of Dubai World, a government-owned conglomerate with significant investments in seaports, leisure and construction across the emirate. The implications any default would have been potentially catastrophic for a state whose rapid growth has only been made possible through the twin forces of credit and confidence.

In the wake of the request, the government of Dubai made it clear that despite owning the business, it would not bail it out. The governing articles for the company as set out in the investor's prospectus states that, "The Government of Dubai does not guarantee any indebtedness or any other liability of Dubai World."

The government's unwillingness to lend support to one its major enablers severely shook the confidence of a number of international investors. Several prominent credit rating agencies, including US-based Fitch and Standard and Poor, slashed their outlook on Dubai in the wake of this announcement.

Contrary to the mainstream perception, Dubai is in fact relatively oil-poor. It has borrowed heavily from petroleum-rich neighbour state Abu Dhabi, which threw out a $10 billion lifebelt in mid-December. The Abu Dhabi bailout led to a sigh of relief audible across global stock markets. The opening of this latest prestige project will, it is hoped, provide a much-needed boost to Dubai's image as a solid cash cow.

The problems for Dubai World, however, don't end there. The loan may have bought them some much-needed breathing space, but the $10 billion was ringfenced specifically for Nakheel. Last August it was declared that the company as a whole owed $59 billion. Some analysts now think the true figure might now be more than $100 billion.

The super-boom that gave birth to the glitzy desert playground was never going to be sustainable in the long run. The question is whether the expansion has been properly financially managed, or whether we have seen, as one US commentator put it, "rapid growth at the expense of accountability."

There is currently uncertainty as to whether more bailouts will be required and what might happen if the wells of neighbourly goodwill dry up. The system for large-scale bankruptcy proceedings in Dubai has gone hitherto untested. A so-called "re-organisation law" has been introduced to provide a framework should internal restructurings prove insufficient to return the company to solvency. If this does happen, it will be interesting to see how the Islamic financial practices might affect proceedings.

Under the system of Sharia law, which governs the Emirates, the Western system of credit and speculation as we understand it is forbidden, as the accruing of interest, or riba, on a debt is prohibited. Instead, the investor is issued with a sukuk, or certificate, which entitles them to a share of the property. The sukuk is then rented back to the issuer at a rate that is set beforehand. The issuer is also contracted to repurchase the sukuk for 100 per cent of its original price.

This means that the $10 billion loan from Abu Dhabi effectively gives them ownership of that amount of real estate until such time as the sukuk can be repurchased. This has lead to musings in some quarters that the religiously conservative presidential state of the UAE is perhaps seeking to exert more influence over the development of its brash and ostentatious neighbour, although this is denied by the respective players. The eleventh-hour renaming of the tower (originally publicised as the Burj Dubai) in honour of Sheikh Khalifah of Abu Dhabi will, however, do little to stem these murmurings.

So what of Burj Khalifa itself, admired by some as a rare example of avant-garde urban design but reviled as a raised middle finger to the planet by environmentalists? Will it stand for future generations as a ruined monument to the state's legendary excess? Probably not. The tower, for now, seems safe. According to its public relations department, the majority of the apartments within its complex have already been snapped up by punters eager to grab a taste of half-mile-high living. Many of these were sold by Emaar long before completion, however, and have subsequently been re-sold at a reduced price. Whilst, on the ground, the petrodollars continue to flow, it remains to be seen whether the reviewed repayment schedule - now set for the end of April - will be met, or whether the whole of Dubai World will prove a house built upon the sand.

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