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There has been a recent string of record-breaking real estate deals in Dubai. In 2022, two villas on Palm Jumeirah sold for $76 million and $82 million. A Dubai penthouse sold for $112 million in February, and two other penthouses sold for $114 million and $204 million in May.
This bonanza has stoked speculation that the influx of foreign ultrahigh-net-worth individuals to Dubai and the resulting boom in the ultraprime property market (properties selling for more than $10 million) could carry the United Arab Emirates’ post-oil economy to sustained heights. Under the assumption that the dramatic rise in Dubai’s residential property prices since mid-2021 is a long-term trend, some developers have been revisiting their shuttered projects, including some of the massive “Palm Island” projects. On May 31, Dubai’s ruler, Mohammed bin Rashid al-Maktoum, approved a new masterplan for Palm Jebel Ali, an artificial island project that has been on hold since 2009. Developers are mulling the resuscitation of other projects, including Dubai Islands (formerly known as Deira Islands), which has been scaled back and redesigned several times.
But will these sales, and the influx of foreign money to Dubai more generally, help or hinder broader economic development?
Is Focusing on the Luxury Real Estate Market Good Policy?
The most direct impact of major real estate sales is on government revenue. The Dubai Land Department levies a transfer fee on direct property transactions. With sales at about $65 billion in 2022, this fee is a sizable source of income for the oil-poor emirate. However, in the absence of an income, wealth, or inheritance tax, the government will be unable to generate a continuous income stream from ultrahigh-net-worth individuals (and if taxes are introduced, these individuals may very well decide to move).
Residential property investment also creates economic growth in the short term, but its long-term impact on the wider economy can be minimal or negative, as overinvestment in real estate crowds out commercial investment and other industries while real estate oversupply creates waste in the form of stranded projects. The relationship is complicated further by the volatility and propensity for corruption of the construction industry. So focusing too heavily on the housing sector can harm the economy as a whole, and demand from ultrarich foreigners prices out local demand.
There are signs that Dubai’s recent uptick in residential property sales has not spilled over to the wider economy. While residential property sales have soared in the emirate, commercial property sales are continuing a seven-year decline, with retail and office space projects being cyclically started and abandoned. The recovery of Dubai’s residential rents lags far behind the soaring sales. This growing price-rent ratio suggests that residential property prices may be detaching from economic fundamentals.
Real Estate Indexes for Dubai
Moreover, Dubai’s landscape remains pockmarked with empty lots and half-finished development projects, including some that date back to the 2008-09 financial crisis, such as Palm Jebel Ali, Palm Deira, and Dubai Pearl, as well as recent projects, such as the Mall of the World, Dubai Creek Tower, and Meydan One Mall.
The UAE’s gross domestic product per capita adjusted for purchasing power parity has been flatlining for the last seven years and remains about 30% below its 2004 peak. Similarly, the Dubai Financial Market General Index has languished for over a year, still trading at about 70% of the 2014 post-financial crisis peak. Citizens report difficulties finding jobs, and food and fuel prices are up. If Dubai’s real estate surge is having any positive effect on the economy, it has yet to show.
Even if there were significant positive effects on the economy as a whole, how durable would Dubai’s ultraprime property boom be? The sharp rise over the last two years appears unsustainable, reminiscent of the pre-financial crisis boom in Dubai but without that era’s specific international financial challenges. Many of its drivers are external factors, such as the influx of Russian ultrahigh-net-worth individuals, following Russia’s invasion of Ukraine, who see properties in Dubai as a safe location for their money. The flow of money of questionable origin into Dubai has historically been a driver of the emirate’s luxury real estate growth, with many transactions taking place in cash or cryptocurrency. Since 2022, the UAE has strived to increase compliance with international anti-money-laundering standards, which, if consistently implemented, could significantly reduce demand for luxury housing. The greatest risk for the sector, however, remains another global downturn due to a shock such as the collapse of a Chinese real estate bubble or a new banking crisis.
In the end, the hyperfocus on luxury real estate is, if anything, a sign of a lack of economic diversification. Rather than fixating on megaprojects, Dubai could be better served by more public investment in education and universities, which could generate more homegrown innovation and research and development. If, or when, the current real estate surge ends, failing to diversify Dubai’s economy will become a major liability.
More Billionaires to the Rescue?
While focusing on the luxury construction sector appears to be a narrow and risky strategy reminiscent of past economic failures, some commentators have focused not on the penthouses but on their inhabitants. They seem to believe that what the UAE needs most is more billionaires, framing the wealthy as “job creators” and “growth drivers” and adopting the rhetoric of trickle-down economics.
To start, it is unclear how many of these apartments and villas are bought as dwellings rather than investments. Since the financial crisis, luxury residential properties around the world have increasingly been acquired as capital “safe havens” or “pieds-à-terre,” and the same will be true for at least some of Dubai’s ultraprime properties.
But even if there is a massive uptick in ultrahigh-net-worth individuals moving to Dubai, decades of research have demonstrated that inequality, especially wealth inequality, hurts growth, discrediting the theory of trickle-down economics. In a poll of the world’s leading economists, 62% agreed that growing income and wealth inequality in the United States is “a major threat to capitalism.”
The economic impact of billionaires is complex. Extreme wealth can come from different sources, including entrepreneurship, inheritance, rent seeking, and nepotism. One seminal study found that wealth stemming from inheritance or political connections tends to have a detrimental effect on economic growth, while there is mixed evidence on the beneficial effects of billionaire entrepreneurs.
It is not billionaires but highly skilled entrepreneurs, and not large corporations but small and medium-sized enterprises, that drive business and job creation. Therefore, instead of attracting billionaires, most of whom are not entrepreneurs, Dubai should focus on attracting highly skilled professionals and experts who may become rich by starting businesses and creating jobs.
This means that, even if buyers of ultraprime property live in Dubai, the local economy will likely not benefit if they are heirs or oligarchs. But Dubai’s economy may benefit if property buyers are entrepreneurs who move their businesses with them. And as wealthier people tend to consume less as a proportion of their income and save more than less wealthy people, attracting upper-middle-class professionals and experts would more effectively boost consumption. In addition to actually living in Dubai, these people tend to spend a higher proportion of their income and spend more of it locally, whereas billionaires tend to spread their consumption internationally.
Another argument for attracting the ultrarich is that billionaires bring financial assets that financial institutions can use for loans in the local economy. This relies on at least two tenuous assumptions: that billionaires have sizable liquid assets, which is rarely the case (Elon Musk does not have $200 billion in his bank account, for example), and that they will bring these assets with them if they move to Dubai. The second assumption is overly optimistic: Modern wealth management relies on complex combinations of investment vehicles; ultrahigh-net-worth residents of Dubai will want to diversify their wealth geographically, and although the UAE is making progress in developing its wealth management industry, expertise remains highly concentrated in a handful of global finance hubs. Finally, even if billionaires deposited sizable liquid assets in local banks, it would be a solution for a nonexistent problem, since Dubai does not suffer from a lack of liquidity.
More Sobriety, Less Hype
Focusing on attracting billionaires and luxury property sales mirrors bets on similarly volatile industries with unclear value propositions, such as the metaverse and cryptocurrencies, often accompanied by hype rather than sobriety and due diligence. Generally, ultrahigh-net-worth individuals are not growth drivers, and construction booms may result in an oversupply of properties. Moreover, Russian money may move back to Switzerland once the war in Ukraine ends, and tighter controls and transparency requirements may dry up some of the demand for Dubai properties.
is an economist and consultant on labor and human capital issues regarding Gulf countries’ transition to a post-oil economy.
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