Dubai Dreams

Middle East Sheikhdom is courting U.S. investors.

February 1, 2008

Sitting on his backyard patio with an unobstructed view of the shoreline, Juan Fernando Valdivieso is as giddy as his two-year-old son Tomás, who’s frolicking on the private beach of the family’s palatial new residence. The Valdiviesos moved into the 5,000 square foot, five-bedroom contemporary home three weeks earlier and remain enchanged by the serenity of their cosmopolitan community.

“We don’t even lock our doors. There’s no crime here,” declared the grinning Ecuadoran native.

Valdivieso isn’t talking about Miami, where he lived for the past 10 years. He, his wife Elizabeth, and their two young sons have found their bliss a couple of oceans east of the Sunshine state, along the silky sands of the Persian Gulf. The Valdiviesos are putting down roots in Dubai, one of seven emirates that make up the United Arab Emirates, and they aren’t alone.

In 30 years Dubai has grown from an obscure pearl-diving village of some 100,000 inhabitants to a megalopolis of 1.5 million. Construction cranes grasp toward the sky everywhere you turn. And only about 10 percent of its exploding population is native to the U.A.E., with Europeans, Indians, and Chinese more likely to be spotted around town than dishdasha-cloaked Emiratis.

Approximately 5,000 residential and commercial real estate projects are in the pipeline, with city planners and developers gearing up for a population surge to 4 million within a decade.

Dubai’s phenomenal growth isn’t the work of Aladdin’s magic lamp, though the Disneyesque architectural explosion erupting from the desert can seem surreal. It stems from the business-minded vision of Sheikh Mohammed bin Rashid al-Maktoum, vice president of the U.A.E. and ruler of Dubai. The oil-based economy is vanishing — it now represents only 5 percent of Dubai’s GDP — so the emir, often referred to in the region as Sheikh Mo, decreed in the mid-1990s that trade, finance, and real estate would be the economic linchpins of the future.

The result has been one of the most audacious construction booms the world has ever seen. The spiraling Burj Dubai, now under construction, is planned as the world’s tallest skyscraper, though no official height has been announced. A second indoor ski resort is in the works.

Local developer Nakheel (the sponsor for this four-day press trip) is constructing 300 islands known collectively as “The World,” using sand reclaimed from the seabed and shaped to resemble the global map. The islands are priced between $15 million and $50 million each, and nearly half have already been sold to individuals and resort developers.

Nakheel is also creating three islands in the shape of date palm trees, including the nearly finished Palm Jumeirah where the Valdiviesos reside. (The largest will be the size of San Francisco, in contrast to Palm Jumeirah’s more petite 1,400 acres, about one-and-a-half times the size of New York’s Central Park.)

Nakheel’s ready answer to questions about buyer demand: The first 4,000 Palm properties were sold in 72 hours. Those who got in early are enjoying the windfall. Valdivieso is renting his current home from an Emirati local who purchased it for $700,000 in 2002. It’s now valued at nearly $4 million. Even entry-level condos, originally priced under $100,000, have tripled in value over the past few years.

Naturally, speculation has begun about whether the strong market will hold. But many investors are convinced it still has a lot of steam. Among the true believers: Donald Trump. His 61-story condo hotel will open by 2011. Meanwhile, the familiar pink facade of the 1,550-room Atlantis Resort is taking shape on the Palm’s outer rim.

In December, Valdivieso plunked down a deposit on a $6 million, 7,500 square foot home. He’s convinced he has not overpaid. “As more people move in here, the home will be seen as a global landmark,” he says. As founder and managing director of Dubai Equity Partners, he’s putting his money where his mouth is, helping to introduce Dubai to Western investors.

Though initially slow to jump into the Dubai market, U.S. investors are gaining a more visible presence. About 100 of the Palm’s 4,000 properties are owned by Americans, with the Internet making it relatively easy to gain a foothold. But in this hot seller’s market, the Western notion of a buyer’s agent has yet to catch on. Buyers work directly with developers’ sales offices, while a wave of dual-agency brokerages have cropped up to serve the resale market.

Robert Lee, Nakheel’s executive director of investment projects, says the company is pushing for greater transparency in Dubai’s nascent brokerage industry.

“Consumers need to better understand the allegiances of the people working with them,” he concedes.

In this topsy-turvy world, buyers pay broker’s commissions (usually 2 percent) on top of the agreed-upon sales price. More U.S. buyers are expected, though, as mortgage financing by local lenders becomes more prevalent. Also, in a move to improve buyer confidence about investing in Dubai, newly implemented regulatory rules require that deposits from buyers be safeguarded in government-managed escrow accounts that developers can’t touch.

Despite a recent U.S. publicity blitz about the moderate Arab city-state, Dubai remains a mystery to most Americans. “It takes time for people to get comfortable with the idea of visiting or investing here,” admits Lee, who is from Canada. But with real estate markets in the doldrums in many parts of the United States and abroad, Dubai may be the tantalizing oasis American investors have been waiting for.

As for Valdivieso, his only regret is one familiar to U.S. practitioners who were selling during the boom. “I should have bought a year ago.”

Wendy Cole

Wendy Cole is the former managing editor of REALTOR® Magazine.