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Dubai, a shimmering collection of skyscrapers and spectacular architectural structures rising out of the desert sands at the eastern end of the Persian Gulf can perhaps be given the accolade of the economic success story of the last ten years.

Dubai lies on the south-eastern shore of the Persian Gulf near the strait of Hormuz, strategically located at the cross roads of Europe, Africa, the Middle East and Asia, making it a gateway to over 1.5 billion consumers located in countries surrounding the Red Sea and the Gulf.

The city has grown rapidly in recent years from little more than a fishing port to a wealthy and decidedly cosmopolitan and modern location. Local emiratees make up a mere 22% of the population with Indians, Pakistanis, Iranians and Southeast Asians and latterly westerners choosing to make Dubai their home. The population remains predominately Muslim. However, in contrast to growing hostility towards western values elsewhere in the Middle East, ethnic and religious tensions are rare and Dubai has gained a reputation as something of a safe haven where westerners can go about their business without fear of attack, and crime in general is very low.

Background

The local currency is the United Arab Emirate dirham, which is pegged to the US dollar at a fixed rate of 1$ = AED3.67. This has made investing in Dubai particularly attractive for European investors, given the US dollar’s recent weakness against the euro and sterling. Dubai’s desert climate ensures plenty of year-round sunshine, with temperatures regularly exceeding 40C in the summer, and 30C in the winter making the city and its locale a very popular choice as a second or holiday home location for Europeans and Americans, especially since ownership rules have been relaxed to allow foreigners to buy property in Dubai.

The city’s rapid growth as a financial and commercial powerhouse has also spawned the rapid development of impressive leisure facilities such as golf courses and hotels (including the world’s first seven star rated hotel, the Burj Al Arab). When combined with its coastal location and attractive beaches, Dubai has become one of the world’s premier tourist destinations. As a result, the city is served by good transport links, both by air and by sea.

Economic diversification

Most of the country’s wealth has been built on the back of vast mineral deposits. However, the rulers of this oil-rich emirate, one of seven in the United Arab Emirates, have been quick to realise that oil wealth will not last forever, and have set about putting in place a series of investor-friendly tax, regulatory and legal policies to attract companies, individual investors and wealthy retirees from all over the global to live, work and do business in the city.

Partly as a result of these policies, economic growth over the past decade has been experienced at rates that would be the envy of any pro-business western economy. Government figures have revealed that the gross domestic product of the UAE as a whole grew by 15% to AED337 billion (US$91.7 billion) in 2004, whilst the economy of Dubai grew at an even faster pace as its GDP expanded by 16.7% to a little under AED100 billion. Dubai’s economy has grown by an average of 10% per year since 1995 – the fastest growth rate in the world, according to Dubai’s Department of Economic Development.

Low tax policies

One major selling point for Dubai is that its enormous oil revenues mean that the government has no need to raise income through direct taxation. Accordingly, the emirate is characterized by an almost complete absence of taxes. This means that there are no withholding or capital taxes and, with the exception of banks and oil companies, no corporate income tax is payable by businesses in Dubai. (Oil companies pay up to 55% tax on UAE sourced taxable income whereas banks pay 20% tax on taxable income).

The government has also sought to encourage global firms with the establishment of free trade zones, such as the Jebel Ali Free Zone (JAFZ) and the more recent Dubai Internet City. Companies operating in the JAFZ can expect to benefit from zero duties on all import and export goods & machinery within the Free Zone, 100% foreign ownership, a renewable 50-year guarantee of exemption from corporate tax, no personal income tax and no restrictions on the repatriation of capital and profits.

The DIFC

Another more recent venture designed to lure the cream of the world’s business and finance community is the Dubai International Financial Centre (DIFC), an onshore capital market begun in 2002 by Sheikh Maktoum bin Rashid al Maktoum, the UAE’s Vice President and Prime Minister and ruler of Dubai who has granted the DIFC much autonomy from the government. Designated as a financial free zone, the DIFC is designed to attract global business talent and facilitate wealth creation which is likely to appeal to both Arab money looking for a local centre of excellence and Western cash seeking sophistication and safety.

Licences are currently being considered in six primary sectors of focus within the DIFC: Banking Services (Investment Banking, Corporate Banking & Private Banking); Capital Markets (Equity, Debt Instruments, Derivatives & Commodity Trading); Asset Management & Fund Registration (Fund Registration, Fund Administration & Fund Management); Reinsurance; Islamic Finance and Back Office Operations. Each of these units will offer benefits such as zero tax on income and profits, 100% foreign ownership, no restrictions on foreign exchange or capital/profit repatriation, operational support and business continuity facilities.

The DIFC will also soon institute an equities and derivatives exchange, the DIFX, which officials hope will fill a significant regional gap as the major financial exchange between Europe and Asia.

Regulatory Environment

Dubai’s financial centre is regulated by the DIFC Financial Services Authority. The advantage Dubai has over other more established financial jurisdictions in this respect is that the DFSC has had the opportunity to draft a body of regulation pretty much from scratch. This has allowed Dubai to build on a framework of established international best practice, whilst avoiding some of the flaws and complexity inherent in the older jurisdictions where regulations have been constantly amended and patched up to keep pace with developments in the financial markets. The DFSA’s rules are written in English and have been drafted after extensive consultations with leading financial institutions.

The DFSA has also been accepted into the international capital market regulator IOSCO (International Organisation of Securities Commissions), a move which should help to show global investors that Dubai takes the regulation of its financial environment seriously.

E-Commerce

Telecommunications and internet links in Dubai are generally excellent as a result of the government’s commitment to developing the emirate into a major regional e-commerce hub. The most significant product of this policy has been the creation of the Dubai Internet City, another free zone which has attracted the likes of Microsoft, IBM, Oracle and other major names in the IT sector. Firms setting up in the DIC also benefit from 100% foreign ownership, no taxes, flexible visa rules to allow the recruitment of foreign talent, and simple company registration and approval procedures.

DIFX - A Regional Financial Exchange

Investors will soon have the opportunity to buy into UAE firms when the Dubai International Financial Exchange (DIFX) launches in September. DIFX will attempt to provide a liquid and transparent market for the hundreds of successful privately owned companies in the region and soon-to-be-privatised businesses. It will also offer facilities for companies from outside the region to be dual listed.

The DIFX has an ambitious plan to attract investors at an “unprecedented rate” for the Middle East, and hopes to emulate other major global bourses such as New York, London and Hong Kong. Its currency will be the US dollar and it will feature a range of instruments including equities, bonds, funds, index products, and derivatives.

Islamic Banking - The New Frontier In Global Finance

The DIFX is also hoping to tap into the vast potential of the Islamic finance market. The global market for Islamic financial products is currently worth over $200 billion and is expected to grow at 12 to 15 per cent a year over the next ten years. It is likely to account for some 50 to 60 per cent of the total savings of the world's 1.2 billion Muslims within the next decade. Within the region, there is a growing number of infrastructure projects requiring Islamic compliant finance. But the market is still under-developed and fragmented. Dubai aims to become a major centre for product innovation for Islamic investors and borrowers.

Dubai already has its first Islamic property fund in the form of the AMLAK First Real Estate Fund, likely to be one of many focusing on investment in Dubai’s property market using the principles of Shariah law. Aimed at both individual and corporate investors, this fund has a minimum subscription level of US$25,000 and a projected rate of return of at least 6%. It will invest using an Islamic financing technique known as Ijarah, which is a form of leasing contract.

Real Estate Opportunities

Underpinning economic growth in Dubai at the moment is a vibrant real estate market, which is helping to fuel the construction of new apartments, offices and residential developments at a frenzied pace, while also presenting attractive investment opportunities for real estate and alternative investors. With the Emirate’s population set to almost double from 1.2 million to 2 million residents over the course of the next five years, it is probable that demand for ready constructed real estate, already at a premium in and around the city, is going to continue outstripping supply for the foreseeable future. Indeed, it is said that within the next five years there will be an estimated 40,000 unit shortfall due to a limited number of Free-Zones where developers are permitted to build freehold properties for non-nationals.

As yet, the UAE government does not guarantee the right of freehold to foreign buyers, although legislation enshrining this principle into law is expected soon. However, this has not stopped the flow of both local and western money pouring into the city’s real estate sector at a frantic pace. A recently publicised report on Dubai's economy by the National Bank of Dubai (NBD) shows that $15 billion worth of investments was pumped into the real estate and construction sector in Dubai over the past three years. What’s more, the report estimates that a further $50 billion worth of investment will be drawn into the sector between 2005 and 2010.

The Dubai Land Department has estimated at AED2.8 billion the value of investments in real estate and land in the Emirate of Dubai in the first quarter of the current year alone - and that is just by Gulf-based investors (excluding the UAE's investors). The department added that 126 Gulf investors spent AED1.2 billion on real estate and land purchases in Dubai in the first three months of the current year.

Unsurprisingly, this has fuelled soaring prices for real estate in and around the city. The initial price for a one-bedroom apartment in Marina Terrace - adjacent to the beach and one of the finest addresses in the city - in May 2003 was AED610,000. The market valuation as per February 2005 was AED1,695,000 AED - an increase of 178%. This has been a story repeated all over Dubai, with many apartments and villas changing hands at a considerable mark-up to the initial price paid even before a development has been finished! (In an attempt to cool the market, developers have begun charging penalties if properties are sold on before completion). Dubai real estate also presents a good opportunity to earn rental income, with many lease agreements structured so that one year’s worth of rent is paid in full in advance.

Although prices are continuing to rise fast, studio and one bedroom apartments can still be purchased relatively cheaply when compared to the major cities that Dubai is attempting to aspire to, such as London, New York or Hong Kong. For AED262,000 (US$71,000), a studio apartment can be acquired in the International City, a residential complex situated in the desert some 6 miles from the city centre constructed in various ‘country themed’ architectural styles; but Dubai being Dubai, there are properties to cater for every taste, if not necessarily every budget. For instance, a 7,000 square feet Signature Villa on the extravagant Palm Jumeiarh development, one of two spectacular new residential projects stretching into the Gulf on reclaimed land in the shape of palm trees, is likely to fetch well over AED10 million (England and Real Madrid soccer star David Beckham was rumoured to be one of the first buyers here).

Buying property in Dubai is a relatively straightforward business, and there are many estate agencies and consultancy services catering for international buyers such as expats, those in search of a second home and investors hoping to earn rental income and/or capital appreciation. Financing a property purchase in Dubai will vary depending on which developer one buys from, one’s own budget and other financing options available at the time. A typical financing structure from a Dubai-based developer at the time of writing would involve: 10% deposit payable on signing; a further 10% after 30 days; five payments on each stage of construction; and a 20% final payment upon completion. Alternatively, if a more flexible payment term is needed, then it is possible to obtain a longer term mortgage. Some developers and agents will also have struck deals with locally-based banks to offer more favourable terms.

For a fixed-rate loan, repayment periods vary from five to fifteen years in length, and at present, one can expect to pay an interest rate starting at around 7.25%, rising to 8.5% as the term progresses. Floating rate mortgages are typically available on loans of between fifteen and twenty-five years with rates starting at around 5% and rising and falling in tandem with the Dubai Interbank Offered Rate (DIBOR) or, in some cases, the US Fed Funds rate. Overseas residents will pay a slightly higher interest rate than residents.

If employed, mortgage payments are made via a salary transfer while self-employed buyers meet payments by writing a post-dated cheque or by a standing order.

Visa and Residency rules

All visitors, except GCC nationals, require a visa, however free visit visas are issued to most nationalities upon entering Dubai. A visit visa is valid for 60 days, but can be renewed for a further 30 days upon paying a fee of AED500 at the Department of Immigration. Alternatively, a so-called ‘visa run’ can be made, which entails flying to Doha (in nearby Qatar) or Muscat (in Oman) at a cost of approximately AED300, and re-entering Dubai on a new visit visa.

In order to work in Dubai, open a bank account or lease accommodation you must have a residency visa. There are two types of residency visa available, one which involves being sponsored by a company for employment and the other which necessitates sponsorship by a family member (for residency only – labour card to be obtained separately).

Visas for business visitors can be obtained by a company working in the UAE. The company applies for a visit visa for a period of one to three months, in accordance with an application form (used by the Naturalization & Immigration Department) and supported by the following documents: a photocopy of the trade licence issued by the economic department; an undertaking letter from the company taking responsibility for the visitor during his visit; a photocopy of the visitor’s passport.

A Multiple Visit Visa can be granted after a normal visa has been issued and used. A Residence Visa stamped on a passport proves the legal residence of an expatriate in the country. This visa is given to workers who have obtained work permits or for relatives living with them permanently, and additional documentation is required.

Conclusion

So Dubai is certainly shaping up to be one of the world’s most popular and significant financial and commercial hubs, and there are certainly many advantages to be had from starting a business, investing assets, retiring, living or working in the city. These include the lack of taxation on personal and corporate income, a business-friendly government that is determined to attract and retain investors in the emirate, sound laws and regulatory practices and a vibrant real estate market that continues to promise healthy returns on both capital and rental income. The city’s ever-expanding skyline, bold architecture, ambitious residential developments and year-round sunshine also make Dubai a unique place to live and work.

However, these plus points must be weighed up against the fact that Dubai is still a relative new kid on the block in global business terms, and as such is untested compared to other, longer-established financial jurisdictions, onshore or otherwise. Indeed, some are of the view that boom may turn to bust if the property market overheats, and the continued absence of rights to freehold makes some would-be investors nervous. Also, despite its benign, cosmopolitan atmosphere, one must keep in mind that war and political instability are never far over the horizon in this part of the world.