Dubai: The World Expo 2020 and the problem with bubbles

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Dubai hosting the World Expo 2020 provides the United Arab Emirates (UAE) city with myriad opportunities.

Dubai Expo 2020 - Bertrand Duperrin

But the city will have to work hard to ensure that excess capacity created in the run up to the event does not leave it facing bubbles in areas such as hospitality and tourism, real estate, and energy.

New capacity built to meet demand for the event must be created in a way that ensures sustainability once demand returns to normal.

Some regulation and long-term planning to build upon any gains made in the run-up will be essential for this.

Perhaps the most problematic area for under-utilised capacity post-2020 is in hospitality and tourism. The Expo is expected to attract 25m visitors to Dubai, according to Jyoti Lalchandani, group vice president and regional managing director for market research firm, IDC Middle East, Turkey & Africa.

As a consequence the city is looking to expand hotel capacity and related tourist infrastructure. Dubai has stated its intention to double hotel capacity between now and 2020. Lower capacity utilisation after the event is a certainty, Lalchandani adds. In order to mitigate this as much as possible, Dubai will have to build upon its reputation as a major tourist destination and transportation hub – a reputation that will be naturally enhanced, to a degree, by hosting the 2020 Expo.

Further regional events could prove to be a boost. “The FIFA 2022 World Cup in Qatar less than two years after the Expo is also anticipated to be positive for Dubai, as supporters and tourists take the opportunity to visit neighbouring destinations as well,” he adds. A similar boost was expected by South Africa’s neighbours during the 2010 FIFA World Cup. However,empirical proof of a boost is difficult to determine and in some cases definitely did not appear.

Post Expo hotel capacity utilisation remains a question mark but other supporting infrastructure should do better. “Dubai will be seen as an attractive city to live and work in, driving long-term positive effects for other sectors, particularly real estate,” says Lalchandani.

But this in itself has raised questions around an unsustainable Dubai property bubble forming, says John Martin St.Valery, founding partner of the Links Group, a company formation firm. “There’s a sign outside Media City reading: ‘Don’t worry there’s no bubble’,” he adds.

The government has made it extremely clear it will not allow the market to get out of control. Regulations that could include caps on rent rises, the prevention of buyers ‘flipping’ projects before completion and ensuring projects are finished before they are sold are also being mooted as possible solutions. Developers will have to realise that restrictions are in place to create a sustainable market instead of a quick buck, says Martin St Valery.

“Keeping a bubble out is always difficult but they’re focused on doing that. There’s already some regulation in place but blind eye has been turned when a boom has hit town.”

“You only know you were in a bubble when it has burst,” says Nick Clayson, partner and Head of real estate Middle East at Norton Rose Fulbright. ”The government has acted positively to address the needs of developers, investors and end-users. For example, the rules of commencing off-plan sales have been tightened to ensure that the project is financially viable from the outset. The government has also continued to legislate to tackle increased occupancy costs by implementing a structured rent cap. They have also changed transfer fees which may have the effect of slowing things down to a more even pace. Beyond government intervention, some developers are introducing their own restrictions aimed at ensuring growth is sustainable and a number of financial institutions that play a critical part in funding development are typically taking a much more careful view when assessing project viability.”

“Although there are justifiable concerns around unreasonable increases in property prices and rents, the stringent regulations on lending practices in the country are expected to counter the worst of these excesses and limit the inherent risks,” agrees Lalchandani.

Thought will also be required when deciding how to deal with Dubai’s energy needs in the future. DEWA, the Dubai Electricity and Water Authority, already has a strong power generation network in place. Total potential generating capacity of around 9.65GW gives Dubai 3GW spare capacity – one of the highest ratios in the world, says Vahid Fotuhi, head of strategic advisory at Access Advisory, a business consultancy.

However, 600MW of that capacity will be decommissioned over the next seven years and replaced with more efficient power generation units while a further 3GW of demand growth is expected by 2020. In order to maintain a minimum spare capacity ratio of 11%, an additional 1.15GW of new generation must be built – requiring an investment of approximately £1.22bn ($2bn), says Fotuhi.

“If, however, DEWA adopts a strategy of maintaining a 30% spare capacity level it will mean that by 2020 it will need to install 2.9 GW at a cost of at least £2.14bn ($3.5bn),” he adds.

Dubai will also have to ensure sufficient fuel to keep its generators going. Most of this will come in the form of natural gas imports from Qatar but the city will also be looking at renewable energy as an option, he says.

If Dubai can create this capacity in time – and live up to its self-imposed carbon targets, it may not have to worry much about an energy bubble – if growth in the level of visitors from destinations such as Asia and Africa meet expectations. Post-expo, Access Advisory expect growth in energy demand to a average 3-4% per annum. This should hopefully be enough to match, but not so much that it exceeds, capacity built in preparation.

Article by Links Group on Jan 13th 2014

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