There may have been 15 different countries represented at the 2008 Cityscape China real estate expo in Shanghai in June, but they all seemed to come from the Middle East. There were also signs that the organizers knew what was to come: A makeshift prayer room was set up near the entrance to accommodate those performing the day’s salah in between bouts of networking.
Property companies from Dubai in particular came armed with detailed and fantastic building models – upcoming contributions to the emirate’s distinctive architectural portfolio. Hands were shaken, name cards exchanged and gift bags doled out to potential investors and ordinary passersby – basically anyone interested in receiving “tours” of the displays.
Yet attracting Chinese investment for ambitious building projects back home was only half the reason Dubai’s developers descended on Shanghai. Flush with capital stemming from a construction boom, soaring property prices and 2007’s favorable capital markets, Dubai property companies are scouring China for opportunities as well.
“Dubai developers are very cash-rich at the moment,” said Lord Edwin Hitti, president of the Arab Chamber of Commerce and Industry in Hong Kong. “They are publicly listed companies and as such are very liquid … They don’t want to have all their eggs in one basket.”
Birth of the boom
The boom began in 2002, when the government opened up the emirate to foreign investment. Speculators entered the market, driving up property prices. An August Morgan Stanley report said Dubai property prices have risen 79% since January 2007, but they are expected to fall 10% by 2010 as supply outstrips demand.
The emirate’s biggest developers and investors already recognize China’s potential. In addition to one-off events such as Cityscape, Dubai property players are setting up permanent offices on the mainland. Jumeriah, the emirate’s most famous hotel management company, Istithmar, the state-owned real estate investment arm of Dubai World, and Emaar, developer of the Burj Dubai, set to be the world’s tallest building upon completion, are among those to have set up in Shanghai.
The luxury hotel sector is a natural place for these players to start out because of the high margins available and their previous experience managing and building some the world’s most luxurious buildings. Jumeriah’s Burj Al Arab, for example, is the world’s tallest building used exclusively as a hotel, with suite rentals starting at US$1,000 per night.
In 2006, Jumeriah was appointed by Shanghai Lixing Group to manage its first luxury hotel in Shanghai, which is to open by the end of this year. The Dubai firm says it expects to open at least four more hotels in China by the end of 2010.
Rates at the 338-room Jumeriah Hantang Xintiandi will be priced 15-20% higher than those at other luxury hotels in China, which stood at around US$230 last year, according to Lilly Ng, senior vice president, corporate advisory, at real estate consultancy Jones Lang LaSalle.
Charging premium prices means Jumeriah will have to offer more to attract Chinese guests in the country’s increasingly crowded luxury hotel market. In recent times, Shanghai has seen an influx of high-end rooms, which has put downward pressure on occupancy levels. But there is still room for innovation.
“If a luxury hotel is able to provide the product commensurate with [a higher room rate], I do believe there’s a market for it,” Ng said.
Meeting the growing demand for luxury surroundings among China’s affluent classes is also on the minds of Dubai developers, most of whom are well established commercial property players.
Stephen Yeung, head of the real estate division for KAB China, an asset management company that offers Dubai property products on the mainland, said most Chinese are looking to invest in mid- to high-level residential properties to let or re-sell. The starting price tends to be no less than US$1.2 million with an expected return of around 20% on the investment. Due to the higher prices and unfamiliarity of the market, Chinese private property investment in Dubai tends to be only a rich person’s game.
In 2007, Hu Bin, a Wenzhou real estate tycoon, paid US$28 million for “Shanghai Island,” a 40,000-square-meter artificial island in Dubai’s “The World” development. Hu told state media he was prepared to spend up to US$200 million more developing the island, saying “it could be a good business opportunity and worth spending some money on it.”
Even with heavyweights like Hu, China still can’t match the volume of Dubai property investment that emanates from other countries – and high property prices are not the only reason.
For most property investors in Dubai, the big perk is gaining immediate residency in the emirate, explained the Arab Chamber’s Hitti. Western Europeans use Dubai residency as a tax shelter, while Indians and Eastern Europeans buy property as means to secure work visas there.
“Chinese investors have been doing it for completely different reasons,” Hitti said. “[They are looking to] carry out commercial investments in Dubai. We have not seen a big trend in individual investors, but more so institutional investors going into joint ventures to get construction and development contracts.”
Bricks, not oil
Attracting Chinese firms interested in setting up construction joint ventures is part and parcel of Dubai’s bid to diversify away from the oil sector. Oil now accounts for only 6.1% of the emirate’s GDP, compared with 22.6% for the construction and real estate sectors.
But Hitti notes that Dubai’s policy requiring Chinese construction firms and developers to pair up with local firms is a turnoff compared with the relative freedom of other markets such as Hong Kong.
A more general challenge Dubai faces in attracting both more individual and institutional investment is the information and language gap between then two areas. Brenda He, China manager of the Dubai government’s Department of Tourism and Commerce Marketing says more face-to-face meetings – through road shows and business fairs – are needed to bring Chinese people up to speed about Dubai as an investment destination.
“The big issue is that China is short of information,” she said. “It doesn’t know much about what is offered in Dubai.”