Dubai Becomes Investors’ Safe Haven

Geopolitical chaos and Dubai have an interesting relationship.

Many of us are aware that during the Arab Spring, Dubai was the safe haven of choice in the Middle East. The city also grew the fastest in the world in the chaotic aftermath of the US-led invasion of Iraq with 13 per cent annual GDP growth from 2003 to 2008.

So will Dubai again be a safe haven as money leaves Russia in the wake of economic sanctions over the crisis in Ukraine? Could the break up of Iraq and the formation of the Islamic State have an impact? What about the horrific recent events in Gaza? What about the to and fro with Iran’s nuclear programme?

It is certainly easy to imagine some serious Russian capital flowing Dubai’s way. The city is already well known as a popular holiday destination for Russians, many have bought homes in Dubai and business links are strong.

The violence in Iraq, Syria and Gaza are another matter. There is geographic proximity, but many other factors are at play.

However, what probably assures Dubai further growth under almost any circumstances is the ease and openness of the city to businesses of almost any sort.

One of capitalism’s established tenets is that if one area of the world becomes difficult for business, then the money will move elsewhere.

Dubai has always worked to create an environment in which capital from overseas can be invested for higher returns. We know that one way it does so is by not directly taxing its residents on their income or capital gains.

This is a win-win environment for global investors with the savvy to work in an environment without the suffocation of too much bureaucracy or legislative protection.

It’s also part of the explanation for Dubai’s rapid recent recovery from its awful recession of 2009, real estate crash and massive debt write-offs.

On the other hand, if the world goes through a second global financial crisis, Dubai will hardly be unscathed as one of the world’s most open economies. The recent correction in the Dubai Financial Market (DFM) may be predicting a coming recession not a boom. A fall in 2006 did forewarn of the big collapse in 2009.

But the most recent boom in the city is just a shadow of what happened from 2003 to 2008 and without those excesses, any correction will most likely be commensurately less painful.

Announcements like the largest mall in the world to be built opposite the existing Mall of the Emirates have suggested that those heady times were returning. Last time around, it was the Mall of Arabia, now lying abandoned by the former Emirates Road.

The Dubai house price boom of 2013 has also slowed down considerably this year – though it is arguable that when you have the highest price rises in the world, there is only one direction for them to go next.

We have seen that 30 per cent price increases have slowed to a relative snail’s pace. Impressive sales volumes have, however, been maintained.

All the same, Dubai will most likely not avoid all the economic bumps on the road to holding the World Expo in 2020, even if the city does end up gaining again as a safe haven.

This autumn looks particularly challenging for global financial markets with stocks looking overvalued by historic measures and too many geopolitical issues without any easy solution in sight.

Local optimists will view setbacks as buying opportunities. Those who have treated geopolitics in this way in the past have scored considerable success in stocks and real estate. Buying cheaply into a high-growth city seldom fails in the long run.