The Slump Hits the Gulf: No More Palm Islands?

About three years ago, when Saddiq Khan finished college in Pakistan and began working for a real estate brokerage firm in Dubai, it seemed impossible not to make money. Foreign buyers from Europe and the U.S. were flocking to the Gulf to get a slice of the oil boom and take advantage of the region’s loose tax laws and resort lifestyle. Developers competed to launched one headline-grabbing mega-project after another: a ski slope inside a shopping mall, luxury skyscrapers, condos on artificial islands shaped like a giant palm tree. “It was crazy,” says Khan, 25, now a marketing executive for Clifton, a real estate agency in Dubai. “Projects would sell out a couple hours after opening.” He used to collect checks from clients and wait in line overnight at the developers’ offices like a teenager looking for rock concert tickets.

Now the bloom is coming off the boom. Foreign buyers have scattered, and Khan now has to drum up customers over the Internet or with magazine ads. “No one’s got cash in their account,” sys Khan. “Now in the back of their mind everyone is thinking, is this going to be the crunch?”

Petro-economies once seemed impervious to the American sub-prime mortgage mess. That view is reflected in a grim joke making its way around Wall Street and the City of London about the options left for laid-off bankers: “It’s Dubai, Mumbai, Shanghai, or goodbye.” But the reality may be even grimmer. In fact, Dubai and the other oil-enriched regions of the Arab world aren’t quite the safe havens they once were. Western and Middle Eastern markets are more closely intertwined than they were during the 1970′s oil boom. But recently, Arab exchanges have been hit with a double whammy. Western investors have pulled out of Arab markets to cover bad deals back home, at the same time that Western economic problems have pushed down the price of oil from its high of $145 a barrel in July to just under $100 a barrel on Monday. On Monday, Saudi Arabia’s Tadawul exchange — the largest in the Arab world — dropped 6.5%, bringing this year’s loss so far to 34%.

Arab banks are finding it harder to provide financing on their own for the often wildly ambitious real estate and development projects that had become commonplace in the region. “Every day you could open the newspaper and read about new mega-projects worth billions of dollars,” says Nazem Al Kudsi, the chief executive officer for Abu Dhabi Investment Co., which is part of a sovereign wealth fund that recently bought New York’s Chrysler building. “Today, there are not as many projects in the system.”

(See more photos from the Middle East here.) Still, even amidst a global economic slowdown, the outlook for the Arab economies will remain sunny. As long as oil stays above $60 a barrel, governments won’t have to cut their budgets, says John Sfakianakis, the chief economist at Saudi’s SABB bank. And jitters on Wall Street could sharpen the eyes of Arab regulators for the kind of irrational exuberance that got American investors in hot water. “The unscrupulous spending of the past will be slowed in the months to come, which will have a positive impact overall,” says Sfakianakis. “Many Gulf economies were growing so quickly that they were on the verge of overheating.”

Wary sovereign wealth funds from Arab countries aren’t likely to rush in to buy the assets of Western financial companies just yet, according to Sfakianakis. Some have already been burned, like the Kuwait Investment Authority, which bought Merrill Lynch shares worth billions earlier this year only to see the stock plummet in recent months. So for now, Arab investors are likely to refocus on infrastructure projects in their own countries that create real value and services for their economies, which are bound to keep growing even in the midst of a Western financial crisis.

For his part, real estate developer Khan still has faith in the seemingly inexhaustible ability of Dubai developers to wow the world. “Who ever thought you could build a palm island?” he says. “You can never imagine the things they’ll come up with next.” In fact, if prices come down a little more, he’s thinking of buying a few properties of his own, perhaps a villa for when he grows older and starts a family. “My grandfather had a saying: Land will never let you down.” That’s a maxim that could be severely tested — even in Dubai.

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