‘Dubai World’ Recession-B.V.Raghunandan, SVS College, Bantwal

Department of Business Administration,

St.Joseph’s Engineering College, Vamanjoor

December 8, 2009

Dubai- Institutional Profile

• Dubai Holdings- Private Investment arm of Sheik Mohammed bin Rashid al Maktoum

• Dubai Holdings has four divisions: Property, Leisure and Hotels, Investments and Free Zones including tax-free business parks

• Dubai World-Property, Leisure and Hotels

• Investment Corporation of Dubai-Supervisory Body of all Government Projects

‘Dubai World’-Recession

• Dubai World –the Real Estate Investment Arm and Nakheel is a subsidiary for creating islands like Palm Island

• Source of Revenue: Crude Oil Export, Tourism and Trading Margins

• Projects: Infrastructure, Lavish Hotels, Reclaiming Land, Race Horses in the USA

• Huge Investment in Real Estate Development

Rationale for the New Projects

• Dwindling Oil Resources

• Expensive Life Styles of Royal Families

• Need for Developing Alternate Sources of Revenue

• Developing Tourism and Duty Free Shops

Nature of Projects

• Iconic Projects

• Targeted at Most Affluent Customers

• Built for Royalty

• Every Project is Showcased to the World

• Projects Executed to Meet the Deadlines

• International Technical Expertise

• Finance through International Borrowings

General Defects of the Projects

• Defective Location

• Unnecessary Grandness

• Too Many Projects in Succession

• Instability in Tourism Industry

• Redoing

• Using Expensive Consultancy

Projects

Palm Island

Cost Nightmare

• Huge Construction Cost

• Very High Fixed Cost

• Unreachable Break Even Point

• Wastage Through Redoing

• Huge Cost of the Land (In the sea)

• Fluctuating Fortunes

• Expensive Consultants

Marketing Myopia

• Class Marketing-Unstable

• International Customers-Choice is International

• Real Estate Boom becomes a Bubble Quickly

• Single Product-Tourism; No Possibility of Product Diversification

• Political Instability of Middle East Ingrained in the minds of International Customers

Finance Debacle

• Presence of a Huge level of Debt leading to High Debt Equity Ratio

• Contrary to Sharia Principle frowning upon lending for an interest

• Unsteady Revenue

• Hasty Completion of Too many Projects without waiting for revenue from the Previous Projects

• No proper Project Evaluation (not using Investment Bankers)

Impact

• Dubai is not a Big Trading Partner of the World as the US is

• Crude Oil Market is Bullish

• Projects are being Halted

• Abu Dhabi may Bail out Dubai

• Non Real Estate Activity continues

• Debt is likely to be rescheduled

• No Possibility of Recession

Impact on India

• Regional Bias

• Kerala, Tamil Nadu and Dakshina Kannada District of Karnataka

• Employee Profile Bias

• White Collar Jobs may not be affected

• Skilled Workers and Semi-skilled and Non-Skilled workers in the Real Estate may be affected

• Indian Real Estate is booming

Comments of International Bankers

• Michael Geoghegan, HSBC Group chief executive “ I am confident that the leadership of Dubai and the UAE will overcome any short-term issues they face, which appear to have been somewhat sensationalised, and continue to lay the foundations for sustainable growth".

Comments of International Bankers

• World Bank Group President Robert Zoellick, “the Dubai debt crisis is manageable and it would not affect India”. 

Centre for Development Studies

• Study of CDS for Department of Non-Resident Keralite Affairs reveals

-25 lakh NRIs from Kerala

- 37000 to 60,000 lost their jobs

-Of the remaining,58% remained in the same employment

-42% moved to another sector of employment

-ready employment in Indian Infrastructure Industry

Blown-Out Press Coverage

• Western Media

• Action of Short-sellers

• Increasing the Terms of Restructuring

• Increasing the Premium on Credit Default Swaps

• Creating a dampening effect on the Commodities market particularly on Gold and Crude Oil Markets

THANK YOU