Dubai – What happened?

Similar to the Crisis of Credit Visualized, this was a short lecture we received in our visit to Abu Dhabi where a speaker described the details of what happened in Dubai. It is a chain reaction of various events and it is interesting to see how these mechanics and relationships interplay.

Our story begins with the UAE dirham being pegged to the US dollar. With the financial crisis and volatility of the US currency, there was some speculation and rumors that the UAE was considering revaluing the dirham against the dollar.

This caused an influx of capital flowing into the country in anticipation of the revaluation (buying “cheap” dirham in the hopes that the dirham would appreciate after the revaluation).
However, with the great flow of capital into the country, the supply of money dramatically increased and investors began to ask why the money was sitting on the sidelines and wasn’t being invested.

Combine these facts with a soaring real estate market and projects were getting cheap funding, including those which didn’t undergo vigorous due diligence or had less attractive investment profiles leading to speculating on property (buying property to flip rather than to live in – artificial growth).

The catalyst of the bubble bursting came (we’re told) in the form of a UAE government official making a comment that the dirham would not be revalued. There were some concerns about the appropriateness of the comments and venue in which they were delivered, but this apparently sent a message to the market that the dirham’s value would not be dramatically changing and as a result, there was a wave of capital flight out of the UAE which spurred a liquidity crisis.

The only way to stem the liquidity crisis was to liquidate assets and as a result, people began to sell investment properties. With a rush of supply of property in the market chasing limited number of buyers, the housing market dropped in value and companies like Nakheel found themselves strapped for cash (resulting in the potential delay of sukuk payments).