International investors have learned the hard way about the legal quagmire surrounding development in Dubai's real estate market.
The country that once boasted the world's tallest building, an indoor ski resort and man-made palm islands had attracted Afghani business and political leaders to invest deposits from the Kabul Bank – which nearly collapsed last month.
But the real estate crash that resulted in mammoth unemployment and unfinished skyscrapers in the glittering jewel of the United Arab Emirates snarled finances and business relationships worldwide.
A report in the October 6 global edition of The New York Times noted that Dubai's top developer, Emaar, is still holding on to the down payments of those who purchased luxury apartments. Some investors were forced to fork over down payments as high as 80 percent before construction – and they are legally unable to walk away from the loans, even though their homes were never built.
The Dubai legal system apparently has no recourse for those who are trapped between the contractor and the the reality of a gaping space where their apartment ought to be. Nor is there any way for investors to find out where their money has gone.
The only clear fact is the reality of a real estate market gone belly up, with commercial real estate vacancies still rising and a glut of unfinished glamor, such as the Jumeirah Lake Towers and Dubai Silicon Towers, that had been slated to unfold.
But the signs of a “boom-bust” cycle were already in place much earlier – as far back as 2004, according to an analysis penned by Daniel Hanna, Middle East economist for Standard Chartered.
At that time, some 20 percent of Dubai's workforce was employed in the real estate and construction sector, which did not include additional employment in related fields such as sales, design and finance. Service sector jobs were expected to grow as well.
The economy, and Dubai's real estate market, both remained vulnerable to both economic and geopolitical risk. “The latter is particularly important, given the importance of tourism to Dubai,” he wrote. “The March Madrid attacks highlight that terrorism is a risk for any city.”
The rising level of vacancies and a prevailing “build and they will come” approach that appeared to overtake the city's developers pointed towards future problems. In addition, the “continuing uncertainty regarding the exact legal nature of freehold agreements in Dubai” also raised red flags for the analyst.
Just a year later, in 2005, a report by Bloomberg News quoted Sultan bin Nasser Al-Suwaidi, Governor of the Central Bank of the UAE, warning that “The drive for economic development which has been promoted by certain emirates, such as Dubai, will be shot in the foot.” Al-Suwaidi expressed concern there might be a stock market correction that could affect real estate prices and economic growth.
Rising inflation was reflected in a 10 percent jump in the price of goods and services across the board – twice the national average – and share prices outpaced earnings expectations in regional stock markets, including Dubai.
By 2008, the Dubai property boom had well and truly gone bust. Property shares plunged and the tiny nation's largest private developer slashed jobs as the world financial crisis held the country in its grip. Emaar Properties marked a drop of more than 80 percent that year. Its closest competitor, Union Properties, fell by 78 percent.