Little more than a year ago, Dubai was being hailed as a city of fabulous wealth where remarkable projects were being commissioned on a weekly basis. So far as the construction and property industries were concerned, it was the centre of the world. However, as the global financial crisis has tightened its grip, some of that lustre has faded.
Large numbers of high profile projects have been shelved or cancelled, among them the Trump Tower and Palm Deira. Others have been scaled down or delayed. Newspaper stories of expatriates losing their jobs and fleeing Dubai, abandoning their cars at the airport, have proliferated. An interesting subtext is the news that the government of Dubai has for the first time appointed PR consultants – no doubt on the sensible basis that managing good news is easy; managing bad news less so.
Do we want to finish?
Local developers have been hit particularly hard. Much of their business centred around off-plan sales and the anticipation that these would continue. Properties were purchased and often resold prior to completion, with purchasers frequently making multiple “wholesale” acquisitions and disposals. Like other pyramid schemes this had the effect of driving up market prices. It also had the curious feature that, for some developers, completing the project became a secondary consideration. Dubai’s real estate laws place restrictions on using purchase monies to fund construction until the works have reached a certain stage. However, with each onward sale, the original developer becomes entitled to a small premium.
This was intended to protect purchasers from unscrupulous developers using their money to fund projects. What it actually caused was a spiral of forward selling and since the property being sold was regarded not as a piece of real estate but as a future option, actually finishing it became academic. This was compounded by the failure of many standard off-plan contracts to make any serious provision for compensation in the event of delayed completion. In the situation described above there was no need for such a provision.
Changing market conditions
Until the second quarter of 2008 there were suggestions that the UAE’s model would be “recession proof.” Unfortunately, the UAE is a small part of the global economy and the disappearance of global credit inevitably affected demand in the UAE. At the moment prices started to fall, purchasers started to conclude that they were better off sacrificing their initial deposit rather than continuing with a transaction that might lead to their acquiring a property worth less than they had paid. Since many of those developers had no real borrowing facilities in place, the sudden disappearance of purchasers meant that liquidity disappeared overnight and, with it, the ability of developers to fund projects.
Analysts have largely agreed that a "correction" was predictable if not inevitable. What has come as a surprise has been the suddenness and severity with which market conditions have changed and the fact that following the calamitous events of September 2008, the aftershocks have seen the market sink progressively further (a phenomenon described in the financial analysis website Market Oracle as “The dead cat bounce”).
Growth in disputes
The cancellation of projects has resulted in claims by contractors seeking recompense in respect of lost profits and, more significantly, the value of works already carried out. It has also led to large numbers of disaffected consultants faced with large unpaid fee claims. In some instances, these have been met by belated attempts to allege non-performance by the contractor or consultant; in others by the slightly more ingenuous promise to deal with the matter at some unspecified but hopefully imminent future date. A further feature has been the widespread suggestion of financial discrepancies in applications for payment – some innocent, others less so – again leading to delays in payments and requests to repay sums already paid. Suggestions of failures of corporate governance in almost every tier of the economy are also becoming commonplace.
Unsurprisingly, these market conditions have seen a growth in claims. These are busy times for loss adjusters. Interestingly, in respect of projects that are going ahead, there are indications that the parties are taking a more adversarial approach, as margins grow tighter. It is also being hinted that tendering is actually going to become a competitive process rather than a series of comfortable negotiations.
A maturing market
Prior to mid 2008, Dubai’s economy had been growing at double digit rates. That is not going to be the case in the year ahead. There has been widespread disquiet as to whether pre-2008 conditions will ever be experienced again. However, another perhaps wiser view is to ask whether in fact this is a sign of a maturing market, which is subject to market forces, in which competition is rewarded and where efficiency is a necessity. This is a market in which failure to perform leads to claims – whether contractual or insurance-driven; and where failure to pay sums that are owing leads to proceedings to recover the outstanding amounts. A necessary corollary to this view is to ask whether the projects which have been cancelled were ever any more than future interests.
In other words, this is a marketplace which will be instantly recognisable to any Western construction or insurance professional – particularly those who have lived through the last few decades of economic turbulence.
A change in attitudes
There is a final link in this chain. The scenario described above makes it inevitable that disputes will become more widespread. Whereas previously there was anecdotal evidence to suggest that proceedings would never be brought against a government-owned entity, there is now hard evidence to suggest that such claims are being threatened and, in some cases, pursued. The number of references to the Dubai International Arbitration Centre and the new DIFC/LCIA arbitration centre are growing. Unquestionably, the preference of many in the region is still to sort matters out privately and amicably within the Majlis. However, there is clearly a growing appreciation that more formal methods of solving problems may be coming into their own.
To paraphrase the ancient curse – we live in interesting times.