Thinking big: Plans have been announced to develop the landmark Mohammed bin Rashid City

Towards late November 2012, Sheikh Mohammed bin Rashid Al Maktoum, UAE vice-president, and prime minister and ruler of Dubai, announced a new mixed-use development, Mohammed bin Rashid City (MBR), which upon completion looks set to be the biggest such complex in the world. The plans feature a series of retail spaces (collectively known as the “Mall of the World”) and up to 100 hotels arranged around a central park that will be up to a third larger than London’s Hyde Park. The mall is projected to receive 80m shoppers a year and the park 35m visitors a year. The development will also feature entertainment and cultural facilities, including a Universal Studios theme park and several art galleries and training centres, as well as golf courses and various residential complexes designed in line with green building principles. The city is set to be developed on a greenfield site between Dubai’s Emirates Road, Sheikh Zayed Road and Al Khail Road. Dubai Holding, owned by Sheikh Mohammed, and Emaar Properties, a real estate group owned by the government, will jointly develop the project.

THE ROAD AHEAD: No timescale or cost figure has yet been announced, although Sheikh Mohammed stated that work on the project should start forthwith. However, local analysts put the cost of the project at between $20bn and $50bn, the latter figure being roughly half of the emirate’s current economic output. In 2009, at the height of the credit crunch, Dubai received $10bn in bridge funding from the UAE central bank.

According to Reuters, the Dubai government and related entities (such as state-owned firms) are due to refinance $10bn of debt in 2013 and $31bn in 2014, respectively. Dubai’s debt levels since the onset of the financial crisis in 2008, estimated at 130% of GDP by the IMF in 2010, could constitute a barrier to the emirate taking on more debt in large quantities. However, Dubai’s property developers have a track record of finding funding solutions for big projects. For instance, pre-financing, or off-plan sales, while not unique to Dubai, became a common financing method at the height of the property boom of the last decade. While this method no longer appears to be an option, given current investor caution, it seems possible for both state-led and private developers to find alternative ways of raising the necessary finance.

While local banks are generally fairly liquid, most remain unable to take on a project of this scale on their own, and in any case, the UAE central bank has tightened the rules on lending to state-backed companies in the wake of the financial crisis. Internationally, many banks are looking to increase their reserves and the ongoing euro crisis means institutions are reluctant to increase their exposure to sovereign debt.

NEW SOURCES OF FINANCING: However, one more possibility is Islamic finance, or more specifically, Islamic bond funding. Given the fiscal constraints, the authorities in Dubai are reluctant to underwrite debts incurred by state companies. However, sukuk, (a form of sharia-compliant bond) could be one feasible solution. Islamic finance is a relatively well-developed sector in the UAE and there is currently a dearth of sukuk-funded projects compared to the volume of cash in sharia-compliant funds. Nakheel, a government-owned real estate development group, successfully issued a Dh3.8bn ($1bn) sukuk in 2011 and Dh227m ($62m) in April 2012. A report from Deutsche Bank in 2012 predicted that global Islamic banks’ assets internationally could reach $1.8trn by 2016, up from $939bn in 2010.

Moreover, sources tell OBG that in general, Dubai is not suffering from a shortage of funds as such, but a shortage of high-quality income-generating assets which would attract investment. This means that the right project may well be able to attract investment.

MBR, which most observers OBG spoke with regarded as likely to develop in stages over a number of years, as and when funding becomes available, could be just such a project. Dubai has a solid record of attracting foreign investors, both from within the Gulf region and from further afield. Given projected growth in GDP, visitor numbers and airport passengers, and the emirate’s openness to investment, it looks set to continue to attract funds, both Islamic and conventional.

Dubai, a city known for its love of superlatives, is already home to the largest shopping mall in the world by total area, Dubai Mall, which opened in 2008 and boasts 1200 shops spread over 350,240 sq metres of gross leasable area (GLA). Developed by Emaar as part of its $20bn Downtown Dubai project, the mall covers a total of 548,130 sq metres and features hotels, a cinema, an aquarium, an ice rink, and the Dubai Fountain, a water jet reaching some 150 metres high which offers a sound and light show every evening. Furthermore, Dubai also counts several other ‘destination’ malls, such as Mall of the Emirates, part of Majid al Futtaim Properties, with total GLA of 223,000 metres and some 520 outlets; Ibn Battuta Mall, themed around the famous medieval Arab traveller of the same name and the countries he visited, which covers and forms part of Nakheel Properties’ portfolio; and Deira City Centre, also a Majid Al Futtaim development, with 370 shops. A number of observers have thus questioned what the impact of MBR and the Mall of the World will be on existing retail developments.

NEW BENCHMARKS: However, MBR comes at a time when Dubai is looking to continue to develop the quality and quantity of its infrastructure and position itself as a truly global city. While the emirate enjoys some of the best infrastructure in the Middle East, it is looking to up its game and compete with the likes of London, Hong Kong and New York. Moreover, much of Dubai’s economic growth comes from its status as a centre for tourism and entertainment, meaning the demand for new leisure and accommodation facilities continues to be sustained. As such, the project is as much strategic as commercial, maintaining Dubai’s status as a leading business and leisure city, which will require continuous investment in infrastructure capacity.

Furthermore, Dubai has witnessed solid economic growth of late, with the emirate’s GDP rising 3.2% in 2011 and the Federal Ministry of Economy estimating 2012 growth at around 4.5% for the UAE as a whole.

GROWTH DRIVERS: The demographic fundamentals appear sound; if current population growth rates continue, Dubai’s population looks likely to almost double by 2020, from an estimated 1.5m people according to Dubai Statistics Centre to around 3m people.

Meanwhile, half-year figures from the Dubai Department of Tourism and Commerce Marketing showed visitor numbers up by about 10% year-on-year (y-o-y), set to cross 9m by the end of the year, while the World Travel and Tourism Council forecasts that the sector’s contribution to UAE GDP is set to increase 4.2% a year between 2012 and 2022.

Passenger growth at Dubai International Airport was also up 13.5% during the first 10 months of 2012, from 41m to 47.5m passengers. This figure is expected to reach approximately 98m by 2020.

Although exact figures on the rise in retail spending in the emirate were not available at the time of writing, expenditure at Dubai Mall rose almost 25% during 2011, and The Mall was set to count 62m visitors during 2012. The value of retail sales in the emirate is projected to rise from $31bn in 2011 to $41bn in 2015, according to Business Monitor International.

As noted by CB Richard Ellis (CBRE), a multinational property services firm, supply in parts of the commercial property sector in Dubai, particularly the retail segment, is tight, with occupancy rates currently running at around 90% in shopping centres and at around 75% in the hotel segment, respectively. A CBRE report for the third quarter of 2012, indicates that residential rents elevated around 7% for apartments y-o-y and 8% for villas y-o-y. Yet, these increases were not uniform across Dubai, but concentrated in high-quality properties in already well-established locations across the city. As such, by the time MBR starts to come onstream, the extra retail and hotel space may well have less of a dampening effect than simply be adding necessary new capacity. Moreover, given the significance of retail to Dubai’s image and tourist appeal, boosting the number of attractions in the emirate can only make sense.