Nov. 30, 2009,
With its massive residential, commercial and leisure developments built on oil revenue (and, as it turns out, a foundation of shaky debt), Dubai has been steadily modeling itself for more than a decade into an upscale tourist destination and a regional entrepot for those people and companies looking to do business in the Persian Gulf region.
Already pressured by the global economic downturn, its success could be in further danger as Dubai World, the emirate's investment and holding arm, teeters on the edge of defaulting on $60 billion worth of debt. Those IOUs piled up during its relentless expansion of domestic and foreign investments, largely in real estate.
Dubai Will Hang Over Market SentimentDubai's debt problem may be small in the greater scale of things but it could still have ramifications for how other sovereign-related debt is treated and cap any recovery in global risk appetite.
In addition to major projects on its home turf, Dubai World owns about 6% of the outstanding shares of casino giant MGM Mirage and a half stake in that company's CityCenter project -- an $8 billion-plus mixed-use development on the Las Vegas Strip. At one point earlier this year, the partners were busily suing each other over Dubai's World financial obligations to get the project finished, an early sign of the country's troubles.
All was eventually settled amicably with CityCenter being fully funded and on track to open its first phase next month. On Monday, Jim Murren, chief executive of MGM Mirage, acknowledged the company has "no financial exposure" to Dubai World's troubles and noted the partners negotiated a cross-default provision as part of the agreement.
Long an island of peace and prosperity in a volatile region, the relatively laid-back emirate has had considerable success attracting visitors drawn by everything from its world-class horse races (sans gambling) and an indoor ski slope to the chance to buy into "the World" -- a development of 300 man-made islands arranged roughly in the shape of the seven continents.
Its government takes a far more relaxed approach to recreation than most of its neighbors, with alcohol freely available and beach attire common. There are no cane-wielding clerics patrolling the streets, and while it is far from say, New Orleans when it comes to atmosphere, it is practically Gomorrah compared with other nations in the region, like Saudi Arabia and Iran.
That has attracted both homegrown and international chains to build out thousands of rooms, with Hilton Hotels, Starwood Hotels & Resorts Worldwide Inc. , Hyatt Hotels Corp. , Intercontinental Hotels Group PLC and Marriott International Inc among the companies boasting branded properties there.
By some measures, things have held together relatively well during the recession. Tourist arrivals to Dubai were up 5% through the first half of 2009, largely on the back of slashed hotel rates and an aggressive marketing campaign. Its Department of Tourism and Commerce Marketing said 3.85 million visitors came in the first half of the year. In contrast, 10 years ago Dubai had about 3 million visitors annually; 20 years ago, it was barely 600,000.
However, while the total number of guests staying at hotels is up so far this year, a glut of new supply has dragged down average occupancy to less than 70% from the more than 87% experienced between January and June last year, according to a survey by STR Global.
Dubai ended the first half with about 58,000 hotel rooms, an increase of 17%, and thousands more are due to enter the pipeline in the next few years. (Las Vegas, which also is suffering in the downturn, has just more than twice as many hotel rooms but about five times as many annual visitors.)
Worse, revenue per available room, a key industry metric known as RevPAR, fell by 36% just last month, STR said, as rates were slashed. A cursory check of online-travel sites will turn up four- and even five-star hotel properties offering accommodations for as little as $100 a night.
Those drops are taking a toll even as oil prices stay near the $80 mark. Unlike some of the other emirates like Abu Dhabi, Dubai gets just 6% of its revenue from oil and gas. Production peaked in the early 1990s, the same time it began marketing itself as a commercial center and began a building boom that continued until the bottom fell out of the global real-estate markets last year.
"There was lot of development, a lot of high-end hotels and retailers moving in, trying to make Dubai a luxury destination," said Michelle Chang, an analyst with Morningstar. "The downturn put a damper on that."
Longer term, the prospects for a rebound "are hard to say, but in the near term, the added capacity is likely to put added pressures on all the operators," she elaborated.
Globally, with capacity growth slowing down, Chang added that "generally speaking for 2010, we are expecting occupancy to stabilize but room rates to remain fairly depressed."
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