Dubai - A Stately Business Dome Decreed
by
Stuart Gray, May 2005
IMPORTANT
WARNING:
The contents of this report have been compiled in good
faith by Investorsoffshore.com to provide assistance
to investors, but do not constitute investment advice
or recommendations. Investors should not rely upon the
information given in order to choose types or routes
of investment but should make their own independent
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has taken reasonable care in researching and presenting
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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.
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