FEB 2007 VOL. 2

The Battle of Two Oil Boom Towns: Dubai and Abu Dhabi

When it comes to showing off the riches of this decade’s oil boom, Dubai has certainly stolen the spotlight. A fishing village 50 years ago, Dubai has been transformed into a combination regional financial center, luxury-living enclave and tourist destination. Its daring architecture in office and residential towers has been featured in such publications as Vanity Fair. The level of building activity is so feverish that an estimated 24 percent of the world’s large construction cranes have been deployed there.

But, what about its neighbor Abu Dhabi? Both are among the seven emirates that make up the oil -rich United Arab  Emirates (U.A.E.). But Abu Dhabi, the 300 year old city that is the capital of  the U.A.E., is already known as one of the world’s richest cities, home to major oil, industrial and financial companies. And, for the past several years, it too, has been in the midst of a construction boom, but not nearly on the same scale as Dubai.

Until late January, global investors could be forgiven for overlooking Abu Dhabi. But on Jan. 31, in a stroke of media-grabbing genius, the emirate’s rulers unveiled plans to build several world-class museums and a performing arts facilities designed by superstar international architects Frank Gehry, Jean Nouvel, Tadao Ando and Zaha Hadid , a native of Baghdad.

The new Saadiyat Island Cultural District, named for the island on which it will be built near the Abu Dhabi shoreline, was billed as a “cultural asset for the world.” It’s part of a massive $27 billion mixed-used development on the island (the price tag for the cultural projects was not revealed).

Such a splash is a bit out of character for Abu Dhabi, which is generally seen as more conservative than westernized Dubai, says Victor Smith, CEO of the consulting services division of Ingenium Group, a Toronto-based design firm that has operated architecture/engineering offices in the two emirates since 1990. “It doesn’t have the same motivation to be as entrepreneurial, and probably never will,” he says.

Dubai, by contrast, is freewheeling. Expatriates make up 80% of the population and are allowed to own property; thousands of new luxury apartments are being built for the world’s wealthy and the Atlantis hotel and resort is rising on the artificial Palm Island.

Smith, who heads up the NORR Group Consultants International offices in Dubai and Abu Dhabi, says Western developers and investors should remember that the differences in the two cities are more than cultural: “Business contacts, rules and regulations are bit different, too,” he explains.  Smith’s firm is working on billions of dollars worth of construction projects, notably the Burj Arab in Dubai, billed as the world’s tallest building.

There are no record-setting towers in Abu Dhabi and the new architecture had been a bit less startling than in Dubai—at least until the new cultural projects were unveiled. But there is an impressive array of building including high-rise offices and condo buildings downtown and along its waterfront, and huge shopping centers. The Etilsat communications company’s distinctive tower, topped by a huge globe, is one of the new landmarks, along with the towers occupied by Abu Dhabi National Oil Company (ADNOC) and Abu Dhabi Investment Authority towers. The $3 billion Emirates Palace Hotel, which opened in late 2005 and is managed by the Kempinski Group, boasts a ballroom that can accommodate 2,800, the capital’s answer to Dubai’s Burj Arab Hotel, which has become a symbol of the city’s new luxury status.   

Even as Abu Dhabi loads up on new projects, some regional market watchers are warning that construction may be getting a bit ahead of demand—in both cities. Some residential market trackers have expressed concern that the residential markets in Dubai and Abu Dhabi are heading for a glut, with speculators pulling back from an overdeveloped market.

The U.A.E. newspaper Khaleej Times in January cited concerns by several international banks and brokers about potential imbalances. It quoted a report from Shuaa Capital, which noted: “We expect a minimum of 125,000 units to hit the Dubai market alone between 2007 and 2009, of which the majority is due in 2007 and 2008. By 2009, we estimate there will be a total of 77,000 units targeting high-income occupants, while the projected total demand for these units is just 36,100 for the same year.”

Still, the report added, the supply of residential, commercial, hospitality and retail properties in both emirates “has not yet been able to fulfill the growing demand." Residential sales are still red hot; some 1,400 apartment units available at Al Raha Gardens in Abu Dhabi sold out within 48 hours last year. 

Even as they build up their domestic real estate portfolios, however, investors from the Emirates are expanding globally: These countries want to be long-term players in global finance and their ambitions can be seen in a series of recent deals, says Pádraig Brown, associate director, Global Strategy & Research, International Capital Group, Jones Lang LaSalle in London.

The U.A.E., together with investors in neighboring Arabian Gulf countries are investing more than $10 billion a year in commercial real estate markets in Europe, North America and Asia Pacific, Brown estimates. That is double the level of overseas real estate investment that they made in 2004. Britain continues to be the favorite of Gulf investors. According to Jones Lang LaSalle, these investors plowed $6 billion into UK properties in 2005, including the purchase of office properties by the Abu Dhabi royal family. 

Gulf investors’ real estate acquisitions in the U.S. jumped to $4 billion last year, up from $2.4 billion in 2005. Purchases included the $1.2 billion deal for 380 Park Ave. by  Istithmar, the investment arm of the Dubai government. The price for the former Boston Properties asset set a record for a Manhattan office property.

Other deals by Gulf investors include:

• Tamweelview European Holdings, a subsidiary of Abu Dhabi Government Investment Authority (ADIA),  last year acquired the Sturegallerian, Stockholm’s leading retail and office complex for $580 million. It was the largest property deal in Sweden in 2006, representing nearly 4% of the country’s property market. 

• Istithmar Hotels, a business unit of Istithmar, acquired the historic, 345-room Hotel Washington in the U.S. capital.

• In South Africa, Istithmar acquired Cape Town’s mixed-use Victoria & Albert waterfront development in partnership with London and Regional Properties for $1billion.