Dubai’s Expo win stokes bets of faster economic growth

A view of the Jumeirah Lake Towers development in Dubai (file). Dubai will need to invest almost €6bn ($8.1bn) on infrastructure projects ahead of the Expo, according to Sheikh Ahmed bin Saeed al-Maktoum, head of Dubai’s Supreme Fiscal Committee and chairman of Emirates airline.

Bloomberg, AFP/Dubai

Dubai, the emirate that teetered on the brink of default in 2009, was picked to host the World Expo 2020 exhibition, becoming the first Middle Eastern city to win a bid in the event’s 162-year history. The city’s benchmark index surged to its highest in five years.

Dubai beat Turkey’s Izmir, Russia’s Ekaterinburg and Brazil’s Sao Paulo in a vote organised by the Bureau International des Expositions in Paris on Wednesday. The emirate of 2.2mn people, whose economy is rebounding as its hospitality and property industries flourish, plans to attract 25mn visitors during the six-month event starting October 20, 2020.

The region’s hub for commerce, tourism and trading will need to invest almost €6bn ($8.1bn) on infrastructure projects ahead of the Expo, Sheikh Ahmed bin Saeed al-Maktoum, head of Dubai’s Supreme Fiscal Committee and chairman of Emirates airline, said November 17. HSBC Holdings estimates government and private expenditure will reach Dh67bn in the run-up to the Expo.

“Dubai’s Expo 2020 win will lead to an acceleration in the implementation of the investment plan,” chief economist Monica Malik and strategist Simon Kitchen at investment bank EFG-Hermes Holding wrote in a report on Wednesday. “Regardless of the long-run impact of the Expo win, it is clear that Dubai’s economy is in the middle of a strong cyclical upswing that is supportive for earnings surprises.”

Dubai’s economy, already headed for the fastest expansion in six years after domestic output grew 4.9% in the first half of 2013, according to government data, may grow 6.4% on average over the next three years and potentially 10.5% annually to 2020, Barclays said in a November 26 report. Bank of America Corp said in September the Expo may boost GDP by 0.5 percentage point annually and 2 percentage points in 2020.

“What winning this event means is that the rise in supply will be met by a rise in demand — associated with the event itself, but also with the population growth that accompanies the infrastructure build-out,” Liz Martins, Dubai-based senior Middle East economist at HSBC, said by e-mail. “It also means that investment should be channeled into more productive projects, in contrast to the somewhat frothy nature of the last construction boom, which ended painfully for Dubai.”

Deutsche Bank said Dubai needs some $43bn to upgrade its infrastructure, the bulk of which would go into expanding hotels and other leisure facilities, with some $10bn more for transport infrastructure. 

Real estate prices in the emirate slumped as much as 65% since their peak in 2008 after the global financial crisis tightened credit. Before the crisis, Dubai was famed for headline-grabbing development plans, including three palm-shaped islands off its coast.

The economy is recovering strongly from the financial crisis that led to a 2.4% contraction in 2009, as the emirate’s once-booming property sector tumbled and government-linked companies struggled under a mountain of debt.

Dubai’s property market has since rebounded, with high-end villa prices in the emirate rising 34% so far this year, after climbing 20% in 2012, according to Cluttons data compiled by Bloomberg.

“While the Expo will result in long-term benefits to the Dubai economy and the real estate market, the short-term impact needs to be managed carefully to avoid the inevitable boost in sentiment translating into excessive price growth or overdevelopment,” Alan Robertson, chief executive officer for the Middle East and North Africa at broker Jones Lang LaSalle, wrote in a report.

Property prices have risen by around 50% since the third quarter of 2011, but are still 45% below the peak of 2008, Deutsche Bank said.

The build-up to the vote for the Expo 2020 has been blamed for contributing to a spike in both purchase prices and rental values, as landlords anticipated a surge in demand.

Authorities have moved swiftly to try to avert any bubble, doubling property registration fees to four% and tightening central bank lending rules.

Dubai property giant, Emaar, also recently barred agents from reselling off-plan property before handover.

“We believe that these new regulations are vital in limiting any further distortion of the market,” EFG’s Malik said.

The emirate’s benchmark DFM General Index surged as much as 4.2% at the opening yesterday. The measure closed up 1.6%, its highest since November 2008. Bets the emirate would win the bid have helped push up the measure 82% this year to become the world’s second-best performing.

Dubai’s Expo will be built on a 438-hectare (1,080-acre) area close to the new Al Maktoum International Airport, which is equidistant from Abu Dhabi, the nation’s capital, and central Dubai.

The World Expo traces its roots to London’s Great Exhibition of 1851. While the Expo left Hanover, Germany, with a $600mn deficit in 2000, it gave Paris its Eiffel Tower in 1889 and drew 73mn visitors to Shanghai in 2010.