MIDEAST MONEY-Dubai's World Expo bid may fuel boom, pose challenge

Reuters

* Decision on Expo 2020 bids expected in late November

* Dubai seen by many as the front-runner

* Event could attract millions of visitors

* But some worry projects could overheat property market

* Problem of using capacity once event is over

By Martin Dokoupil and Praveen Menon

DUBAI, Oct 21 (Reuters) - An international meeting in Parisnext month may trigger billions of dollars of fresh investmentin Dubai - and, if plans are not handled carefully, contributeto the kind of boom-and-bust cycle which nearly bankrupted theemirate four years ago.

Dubai is competing with Izmir in Turkey, Sao Paulo in Braziland Yekaterinburg in Russia for the right to host the 2020 WorldExpo. A vote of the 167 member states of the Paris-based BureauInternational des Expositions is expected to choose between themat an assembly on Nov. 26-27.

Holding the world's fair would be a defining moment forDubai, marking the transformation of the emirate of 2.2 millionpeople into a top global centre for tourism, trade and finance.

But it would carry a risk. Anticipation of a spike in demanddue to the World Expo could cause property developers to buildtoo many residential and commercial projects, and investors topour too much money into them, inflating a speculative bubblethat would eventually burst.

Such a bubble popped in 2008-2010, when the global financialcrisis caused Dubai property prices to crash by more than 50percent, shaking financial markets around the world.

"If Dubai wins the World Expo 2020 bid, we will witnessanother boom in the property market," said Khalid Kalban, chiefexecutive of Dubai-listed property developer Union Properties, whose share price is up 142 percent so far this year.

"Hopefully this will be a planned boom rather than aspeculative one, which we saw before," he said.

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FRONT-RUNNER

Thanks to its status as an international business hub, aswell as a slick public relations campaign, Dubai may be thefront-runner in the competition to host the Expo - although itcould face stiff competition from Izmir, which lost its bid forExpo 2015 to Milan by 86 votes to 65. Signalling Dubai'sdetermination, the logo for its Expo bid adorns governmentvehicles, buildings and emails.

Because of Dubai's small population, the Expo could havemore of an impact on its economy than most host locations. Thegovernment cites a report by consultancy Oxford Economics whichestimates the event would attract 25 million visitors over sixmonths and create about 277,000 jobs.

Many property developers have expressed interest in projectsaround the proposed 438-hectare Expo site in Jebel Ali, nearDubai's new airport and the third busiest port in the world.

"Dubai's real estate growth will be in this area," saidCraig Plumb, regional head of research at consultants Jones LangLaSalle. In particular, "there's a need for more hotels close tothe Expo site."

Some 45,000 new hotel rooms would need to be added, based onthe government's calculation that 70 percent of the visitorswould come from outside the United Arab Emirates, HSBC analystsPatrick Gaffney and Aybek Islamov said.

A huge exhibition centre would need to be built. Dubai'stransport authority said in June that it would expedite plansfor a 5 billion dirham ($1.4 billion) extension to its metrorail line if the emirate won the Expo.

As a result, total spending related to the Expo, includingprivate sector projects, could reach $18.3 billion, HSBCestimated. That would still be dwarfed by China's spending onthe 2010 Shanghai Expo, which totalled some $58 billionaccording to Chinese media reports.

The Dubai government is expected to provide a total of about$6.8 billion of capital spending for the Expo, while the fairwould cost around $1.6 billion to operate, Bank of AmericaMerrill Lynch said in a report.

Such figures, spread over seven years, look manageable forDubai's $90 billion economy, even though it is still recoveringfrom the last crisis; the International Monetary Fund estimatesthat about $64 billion of debt held by the government andrelated enterprises will come due between 2014 and 2016.

Direct economic benefits from hosting the Expo might bemodest. The government estimates it would generate an additional$23 billion in spending by the hosts, participants and visitorsbetween 2015 and 2021. Many of the jobs created would be forrelatively low-paid construction workers from abroad, who remitmuch of their earnings back to their home countries.

Bank of America predicted the Expo could lift Dubai's grossdomestic product growth by around 0.5 percentage point annuallyin 2016-2019 and about 2 percentage points in 2020/21.

It is not certain that a Dubai Expo would make a profit;Shanghai's event enjoyed an operating profit of over 1 billionyuan ($164 million), but Germany's 2000 Expo in Hanover lost $1billion or more after attendance fell short of forecasts.

For proponents of the project, however, the immediateeconomic impact is secondary to the benefits of burnishingDubai's reputation and introducing it to millions more visitorsfrom around the world. Much of the emirate's success has beenbuilt on distinguishing itself through aggressive marketing fromcompeting centres such as Qatar and Bahrain.

"I can tell you now, the benefit will outweigh the cost ofhosting the event," Sheikh Ahmed bin Saeed al-Maktoum, head ofDubai's supreme fiscal council and its Expo committee, toldreporters last month.

Dubai's ruler, Sheikh Mohammed bin Rashid al-Maktoum,described his approach in a book which he published last month:"To take a risk and fail is not a failure. The real failure isthe fear of taking any risk...If we had waited for regionalstability to be restored before launching our large projects,where would we stand today?"

MANAGING GROWTH

One risk for Dubai lies in the fact that its Expo bid isbeing made at a time when the property market is alreadyrebounding strongly from the crash and developers have alreadyannounced tens of billions of dollars of projects this year.

Apartment prices have jumped over 20 percent in the past 12months; the stock market is up 79 percent this year. Inthis climate, winning the Expo could attract a fresh surge ofmoney that overheats the property sector, some analysts worry.

"We think that the property market dynamics are increasinglybeing driven by investor demand rather than end-user demand,"said Farouk Soussa, Citigroup's chief economist for the region.

"The implementation of large-scale projects risksexacerbating existing supply overhang issues and could fuel afuture boom-bust property cycle in the emirate."

The IMF issued a similar warning in July, saying Dubai mightneed to intervene in its property market to prevent anotherbubble from forming.

There are many signs that authorities are aware of the riskand are taking steps to counter it. This month Dubai doubled, to4 percent, the registration fee charged on land transactions;the UAE central bank plans rules to restrict mortgage lendingand limit banks' lending exposure to big state firms.

But such steps cannot guarantee stability in the real estatemarket - especially if Dubai cannot find new occupants for itsprojects once the Expo crowds have gone home.

"The main downside risks include project funding given theexisting elevated leverage in the system, as well as thelikelihood of subsequent overcapacity in the hospitality sector,in our view," Bank of America said.

South Africa saw its hotel occupancy jump to 84 percent forits 2010 soccer World Cup tournament, but the rate plunged tojust over 55 percent in the following year because of fewervisitors and greater supply, HSBC said.

"Dubai's toughest challenge isn't generating growth, it'smanaging its pace," said Simon Williams, chief economist for theMiddle East and North Africa at HSBC.

"The decisions it takes in the months ahead will show uswhat lessons it has learnt from the boom-and-bust cycle of2003-08."

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