Back to basics pays off for Dubai, but property still a drag

Focus: A trip to Jebel Ali port confirms that Dubai's back-to-basics response to the financial crisis that began in 2008 is paying off, writes Frank Kane.

The Jebel Ali port in Dubai is bustling. Jeff Topping / The National

A day at Jebel Ali port last week confirmed what many experts have been saying about the economy of Dubai for a while: that the back-to-basics response to the financial crisis that began in 2008 is paying off.

The emirate's decision to rely on the three Ts - transport, trade and tourism - was evident in the hectic activity of the Middle East's biggest port, through which much of Dubai's essential economic activity is conducted.

Along with the thriving business of airline freight, and the emirate's bustling hotels and malls, the Jebel Ali port is the perfect example of what Dubai does best: trade and commerce, real business.

I was discussing this with a group of bankers and media colleagues at a dinner party thrown by HSBC the other night, and there was a consensus that Dubai was heading the right way in its efforts to recover from the crisis.

By focusing on real business and trade, the emirate reflects HSBC's new positioning. After a decade of being the "world's local bank", with a branch in virtually every major city in the world, HSBC is refocusing to get closer to its roots as a financer of trade and commerce, especially in its Asian heartland.

You can be pretty certain there will be no further forays into fancy financial products in the West and no dallying at the more exotic end of investment banking. For HSBC, as for Dubai, it is back to basics, big time.

But for the bank and the emirate, there are legacies of the bubble years that have to be dealt with if recovery is to be completed. For HSBC, it consists mainly of exiting businesses not deemed appropriate to its new strategy, activities such as US credit cards and retail banking.

For Dubai, it all boils down to one word: property. While all the other indicators are heading in the right direction, with trade and tourism flourishing, and with the feel-good factor from high oil prices still very much in evidence, Dubai still has the millstone of the property crash around its neck. It looks difficult to see how it can be lifted.

The legacy of the great property boom between 2002 and 2008 has skewered other parts of the Dubai economic set-up too. Despite Dubai's position as a "haven" in the troubled Middle East, its financial markets are in the doldrums, becalmed by the effects of the property crash. So many of the constituents of the Dubai Financial Market are property or construction and property-financing related that the continued problems of the property market are dragging them down too.

In the financial and banking sector, Sheikh Ahmed bin Saeed Al Maktoum spoke out recently to reassure regional and international investors that, in the midst of the financial storms buffeting the US and Europe, Dubai's banks still had plenty of cash and liquidity.

As chairman of the emirate's Supreme Fiscal Committee, and of its leading bank, Emirates NBD, his words have authority and credibility.

Nonetheless, many in banking are worried that we have not seen the full effect of the property crash come through in the balance sheets of the emirate's banks. They fear there are more write-offs to come this year and next. Again, the core concern is property.

What light there is on the issue is at the end of a very long tunnel. Property experts are putting back the date by which they expect Dubai's property sector to be back on an even keel, with many now predicting it will be 2014 at the earliest before any clear upward trend is visible in property prices.

The problems of the US and Europe may not be directly affecting Dubai's economy, but they will do nothing to stimulate demand among international investors, who drove the demand for the emirate's property in the boom years.

One expert, the property analyst Saud Masud of Rasmala Investment Bank, is on record as saying it will be 2020 before property prices get back to the levels of 2008, and even that dire prognosis assumes five or six years of what he calls "robust recovery".

It is difficult to see a real solution to the problem. Holding up the supply of new property would simply mean new financial problems for developers and contractors; forcing banks and financial institutions to provide funding for buyers would frighten the living daylights out of lenders.

Even with so many other things going right for it, Dubai is going to struggle for years to overcome its former addiction to bricks and mortar.