City of Gold: Dubai and the Dream of Capitalism (21 page)

That year, London property consultants Jones Lang LaSalle released a
report titled “World Winning Cities.” Researchers studied a hundred cities around the globe, looking for the best performers to recommend to investor clients. They compared metrics like growth in economy, population and employment, and demand for real estate.

Three cities emerged from the pack: Dubai, Las Vegas, and Dublin. The paper turned out to be prescient for all three, which were just starting to erupt with growth. Each had attractive business environments, light regulation, favorable tax regimes, and plenty of inward investment.

Las Vegas was well known. Dublin less so. Dubai was the wild card—an unknown city that, it turned out, had grandiose visions of becoming a world player. Jones Lang LaSalle told clients that Dubai had led the world in population growth (nearly 6 percent a year) and employment growth (more than 8 percent a year) for the previous decade. In both categories, Dubai beat out fast-growing cities in China, the United States, and India.

“In 2002, Dubai wasn’t really on the radar screen of real estate players around the world,” says Jeremy Kelly, the consultant who directed the study. “But we saw an opportunity in Dubai at the time. We identified it as a key rising star.”

Dubai’s glamor was born in an explosion of dust, noise, and sweat. Dozers flattened the desert, and pile drivers sank columns deep into the sand. Cranes crammed the skyline and lined the highways, hauling up gray slabs of prefabricated wall, tureens of wet concrete, and spaghetti bundles of steel reinforcing rod. When the sun set, the night shift kicked into action and the bluish hue of sodium vapor lights lit the city. Observers have dubbed Dubai the world’s fastest-growing city, as well as its largest repository of building cranes, between 10 and 20 percent of the world’s total.
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Mohammed Ali Alabbar’s Emaar typifies the housing boom. On vast tracts of rolling dunes once grazed by antelope and camel, Emaar built Levittowns of cookie-cutter townhouses and Moorish-themed McMansions. The neighborhoods were riven by meandering roads fringed with flowerbeds, with sidewalks for rollerbladers and baby strollers. Bulldozers sculpted golf courses, swimming pools, and tennis courts. The gated communities got names with a California ring: The Springs, The Lakes,
Emirates Hills, Arabian Ranches, The Meadows, The Greens. Western expatriates hungry for homes lined up at dawn, checkbooks at the ready. So did professionals from Iran, India, and Pakistan.

“The world decided that Dubai would become one of its center points,” says Ryan Mahoney, the Canadian managing director of Better Homes, the biggest local realtor. “We didn’t have any inkling it would ever be this big.”

In 2000, Alabbar visited Vancouver, British Columbia, to glean ideas from a city perennially ranked among the world’s most livable. Touring a development, he met Robert Lee, a developer’s agent. Lee impressed Alabbar so much that the Dubaian hired him. The Canadian had handled big projects in Vancouver. But he’d never seen anything like Dubai. “When I came here and saw what was happening, my jaw literally dropped. Wow! It was an absolute stampede,” Lee says. “It was like a fish market. ‘Just give me a property, any property!’”

Not all the developers were as thorough or well capitalized as Emaar. The lack of regulation ignited a boom like the crazed 1920s speculation in Florida. Small operators were exhilarated to find that they could come to the city with a drawing of an apartment tower, buy a cheap plot, get government permission to build, and then sell all the apartments before they’d broken ground, sometimes even before owning the land they would build upon.

“People would buy the apartments and the investor would build the building with that money,” says Mahoney. “This was risky. But it was a great way to excite the worldwide investor community.” It also encouraged cost-cutting and shoddy work, with developers boosting short-term profit by skimping on materials, labor skills, and amenities.

The government did the same thing. It drew up plans for a palm-shaped island and sold off the plots in three days—while the plots were still open sea. With the money they’d collected, the Palm Jumeirah got built.

As the years passed, nothing could slake the thirst for Dubai property. Sheikh Mohammed designated tract after tract as development zones for foreign buyers. He sold the plots to foreign developers and let them build what they wanted. Speculators flooded in and the city grew like a patch of kudzu.

Contractors kept up with demand by switching from low-density townhouses to skyscrapers. Emaar got control of two square miles of
desert, and Robert Lee used his Vancouver experience to put together Dubai’s first neighborhood of apartment towers, the Dubai Marina. Lee drew up building lots, devised prices, and brought the scheme to Sheikh Mohammed for approval. The Dubai crown prince liked the project but not the prices.

“Cut them in half,” he told Lee. “If you sell it low, there’ll be a herd of people and excitement. Everybody will go around saying, ‘Me, too!’” Sheikh Mohammed had done the same thing with building plots alongside Sheikh Zayed Road. He would do it again on the Palm Jumeirah, setting launch prices artificially low. “He was actually playing the speculation market,” says Lee.

The man from Vancouver dug a short canal, bringing a loop of the sea inland. Then, developers clustered the banks of this canal with a mini-Hong Kong. It rose so quickly, it was as if they’d adapted instant ramen noodles technology to building a city. The Marina district is now a dense forest of apartment towers, each with blinking lights to warn approaching aircraft. Some rise above 50 stories. One cluster, the Jumeirah Beach Residence, is a massive conglomeration of yellow concrete that looks vaguely Miami Beach. It’s said to be the world’s largest single-phase housing development, with 36 connected towers and 25,000 residents. All told, the Marina will house 400,000 people in 200 skyscrapers, each vying for a tiny patch of sky.

Buyers didn’t care to see their apartments or townhomes before making downpayments. Developers sold tens of thousands by brandishing drawings of dream neighborhoods with homes, trees, elevated trains, and European families strolling with ice cream cones. It took a leap of faith to trust that empty desert would be converted into the renderings on display. But the theoretical homes sold out in hours, years before structures would be built. Values shot into orbit. In the speculative secondary market, prices on luxury homes quintupled in five years, with properties sold repeatedly before completion. Blocky three-bedroom homes overlooking an artificial lake in The Meadows launched for around $350,000 in 2003. Five years later, they cost $1.8 million.
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“This is pyramid selling by any other name,” says former British ambassador Anthony Harris. New laws in Dubai have since limited the most free-wheeling of these practices.

Problem was, Dubai was creating jobs faster than it was building apartments. Despite six years of round-the-clock building, Dubai’s housing
supply could not keep pace with a population rising by 170,000 a year. The city faced yearly demand for 80,000 homes, but construction crews going flat-out could build just half that many.
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The result was a wildly distorted housing market with prices that spiked up and up.

The housing boom bled into consumer goods and Dubai responded with malls, building them fatter and taller until the city had more mall space per capita than anywhere on the planet.
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IKEA came. Harvey Nichols came. Ace Hardware came. Marks & Spencer and Saks Fifth Avenue came. France’s Wal-Mart-style megastore, Carrefour, came. One mall resembled Venice. Another, the Giza pyramids. Another erected halls based on China, Egypt, Moorish Spain, and India. Another added an indoor ski slope.

Until September 2008, Dubai realtors could declare that no one had lost money in the Dubai property market. A month later, that was no longer true.

If Dubai’s housing boom caught people by surprise, its payoff for its free zone gambles would beggar belief.

The city’s dalliances with free zones harkens to an attempt to kickstart the languishing Jebel Ali port. In 1981, no one wanted to work in Jebel Ali. Berths sat empty. The port was miles from anywhere on the far edge of Dubai. The cargo action was still at Port Rashid in the city center.

At some point, Sheikh Mohammed and the advisers that coalesced around him, Sultan bin Sulayem included, decided to convert Jebel Ali into a free port and manufacturing district. It was to become a special economic zone, where companies could import raw materials, assemble finished goods, and reexport those products. The area would be exempt from the federal government’s 5 percent import duty, as well as the Companies Law, which prohibited majority foreign ownership of any business. That law was Dubai’s biggest impediment to foreign investment. The UAE government in Abu Dhabi requires foreign companies to find a local partner to take a minimum 51 percent stake. Dubai got around the law by declaring the port a free trade zone.

The plan worked—slowly. A few dozen companies moved into the
port in the early 1980s. That jumped to two hundred by 1990, and then seemed to achieve critical mass. By 2006, more than six thousand companies operated in the fifty-two-square-mile free zone, now packed with warehouses and trucks hauling goods for reexport to Iran, Africa, and the rest of the Gulf.

One thing irked the crown prince. The companies flocking to Jebel Ali weren’t exactly high-tech. They were textile sweat shops, tire and auto parts importers, and the like. By the late 1990s, it was clear that Dubai was missing the Internet revolution. Gulf Arabs just didn’t connect with computers and the Internet in the same way that Americans did. Sheikh Mohammed couldn’t let this pass. He and his advisers racked their brains for a way to tap into technology and reap its productivity gains. The answer came in a study that he commissioned. It said the city would do well to set up cluster zones for two industries: information technology and media. It wasn’t advice that the sheikh would ignore.

In the late 1990s, the northwestern edge of Dubai petered out along Jumeirah Beach. There were a few hotels and a smattering of Maktoum family palaces, including Sheikh Mohammed’s summer villa, a sleek assembly of round buildings with a private island. Most of the area was empty desert and pristine shore. Just inland from the beach lay a salt-crusted lowland, flooded with ponds of brine. It was some of the least attractive real estate in the city.

In 1999, Sheikh Mohammed announced that this lowland would house Dubai’s next free trade zone. Foreign firms would get the same relaxations of federal tax and ownership laws at Jebel Ali, except the enticements would be restricted to information technology companies. There would be unlimited visas for imported workers, no income or corporate tax, and no restrictions on repatriating capital. The swamp got a name: Dubai Internet City.

The job of building Internet City fell to a man named Mohammed al-Gergawi, a midlevel bureaucrat from a poor family who worked in the Dubai Department of Economic Development. Gergawi had the fortune to be discovered years earlier by one of Sheikh Mohammed’s internal spies, known as “mystery shoppers.” In his book, Sheikh Mohammed says he gave Gergawi a promotion when he learned that the young functionary planned to resign for a private sector job. When Gergawi turned
up at Sheikh Mohammed’s
majlis
to offer his gratitude, he learned the sheikh’s agents had been monitoring his performance for four years.
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Sheikh Mohammed took Gergawi under his wing, testing him with ever-larger responsibilities. The young executive carried off several of Dubai’s most successful tourist promotions, including the Dubai Shopping Festival and Dubai Summer Surprises event. Both send shopaholic tourists streaming to Dubai’s malls, hotels, and airlines. The Summer Surprises festival manages to lure tourists to Dubai in the seething depths of summer. It’s an impressive feat.

Gergawi, a bear of a man with an electric smile, is a rare personality. He exudes the energy of a man delighted with his lot in life. Women in Dubai—locals and expatriates—fawn over his George Clooney looks. Like Sheikh Mohammed, he has a reputation for giving wads of cash to strangers. I worked briefly as a consultant at the Executive Office, downstairs from Gergawi. One day he strode into my office with his arm extended and boomed “I am Mohammed al-Gergawi,” and gave me a hearty handshake. We had an easygoing chat. When my son Jay was born in 2007, Gergawi sent a towering bouquet of flowers to the hospital room of my wife, Chloe, that took two men to erect. When I returned to work, his secretary handed me bags of baby clothes.

In 1999, with Internet City, Gergawi got the chance to show what he could do.

Even then, Dubai was an immature city with more ambition than accomplishment. The four-building office park wasn’t huge—the buildings were to be four stories high—but it was supposed to bring dot-com millionaires to Dubai. Architects’ renderings showed manicured grounds with café tables overlooking artificial lakes. Sheikh Mohammed, perhaps sensing that the tech bubble was about to burst, declared in October 1999 that Internet City would be built in a year. It was a ridiculous deadline.

Gergawi and his team rented an office in the Crowne Plaza Hotel and interviewed would-be contractors. The group had only a foggy understanding of the amenities needed. A survey of technology companies provided some answers: uncensored high-speed Internet and Starbucks coffee.

John Larson, an IT consultant from Winthrop, Massachusetts, was one of the contractors who met Gergawi and his team. Larson, an athletic man with jet-black hair and a sarcastic sense of humor, described the communications infrastructure the buildings would need, as well as
the housing and lifestyle requirements of young Western and Asian techies. Larson, forty-six, got the feeling the Dubaians were in over their heads. But when a subcontracting offer came through, he took it.