It’s a fair bet that few around the Thanksgiving dinner table talked much about Dubai last week, even as that Emirate quietly rocked world financial markets with the surprise prospect of the biggest government debt default since Argentina’s back in 2001.
Unfortunately, by the time Americans break out the holiday eggnog, we may all be a lot more familiar with the tiny city-state on the Persian Gulf.
For if ever there was a poster-child for commercial real estate excess, it is Dubai — land of indoor ski slopes, man-made islands and home to what will soon be the tallest skyscraper in the world, a building set to stand one kilometer high.
By one estimate, the postage-stamp sized Emirate was home to 20 percent of the world’s building cranes last year. As Dubai’s debt soared to more than 100 percent of its GDP, or $400,000 for each resident, it became a favored playground destination for the Gulfstream crowd. Indeed, about the worst thing to happen in the tiny Emirate in recent years was Rihanna‘s decision to cancel her half-million dollar concert appearance last spring.
Now, in a familiar repeat of the early days of the residential real estate crisis in the US, Dubai’s debts are coming due and its excessive leverage is coming home to roost. The Gulf State’s decision to demand a six-month standstill on the debt of its Dubai World is a wake-up call no less alarming than the Bear Stearns hedge fund collapse in the summer of 2007.
Back then, as is now the case with Dubai, it was easy for the glass-half-full crowd to brush Bear Stearns off as a one-off. Two years later, the hedge fund collapse is seen as the first of many financial dominoes to fall.
The Dubai debacle also comes at a time when many of the smartest investors in New York, from Wilbur Ross to Mort Zuckerman, have been warning that a commercial real estate collapse in this country is on the horizon. Earlier this month, Ross cautioned that the US is in the beginning of a “huge crash in commercial real estate,” as office vacancies hit a five-year high.
How will this all play out for Mohammed bin Rashid Al-Maktoum, Dubai’s ruler? No one knows for sure, of course, but the Dubai sandstorm is already being felt around the globe — raising concerns about other highly fragile economies including Vietnam, Greece and Ireland.
As Bank of America warned on Friday — “One cannot rule out … a case where this would escalate into a major sovereign-default problem, which would then resonate across global emerging markets. Think Russia in 1998 or Argentina a few years later.”
Indeed, Mark Mobius, the dean of emerging market investing who overseas $25 billion in assets for the Templeton Funds, is warning that a 20 percent drop in stock prices is possible.
And as with the popping of any real estate bubble, there’s also the likelihood of a real estate fire sale as Dubai looks to lighten its debt load. Although Dubai World, the Emirate’s investment vehicle, likes to boast that, “The sun never sets on Dubai World,” it’s certainly looking like dusk.
To that end, investors are also bracing for a possible sale of Dubai-owned properties around the globe, especially in London and New York, and there are lots of them from the Grand Buildings in London’s Trafalgar Square to the Mandarin Oriental Hotel at Columbus Circle.
Of course there’s always a chance that Dubai can restructure its debt (perhaps not so easy under Islamic law) and get a helping hand from its rich neighbor, Abu Dhabi.
But others point to a nation built on tourism, finance, real estate and leverage and see a familiar crisis in the making. Dubai has drawn a line in the sand in an attempt to postpone paying its debts well into 2010.
Has it also just set off the next wave in the global credit crisis? By lots of measures, it sure looks that way.
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