Trump, Armani Refuel the `Dubai Bubble' Debate: William Pesek

Even amid a skyline jammed with massive construction projects, the Burj Dubai is a standout.

In September, it beat the 31-year-old record held by the CN Tower in Toronto to become the world's tallest free-standing structure. When it's completed in 2008, Dubai's tower will be the tallest building in every category and home to one of Giorgio Armani's first hotels.

This is kind of a Dubai obsession -- having the biggest this, grandest that, most ostentatious the other thing. Developers have designs on the biggest shopping mall, the largest theme park, the first submerged luxury hotel and an artificial archipelago that is expected to be visible from outer space.

Dubai seems a unique amalgam of Hong Kong, Riyadh and Las Vegas. No doubt this latter quality -- giant themed hotels and countless construction sites cropping out of the desert -- explains Donald Trump's interest. The Trump Organization's 48- story tower will include about 660 hotel rooms and condominium apartments.

It's no wonder economists are buzzing about the ``Dubai Bubble,'' especially with crude-oil prices near $100 a barrel.

Actually, they have been talking about Dubai's property markets imploding for years -- to no avail. As oil prices rise and Dubai, one of seven sheikdoms of the United Arab Emirates, diversifies its economy, it continues to confound the skeptics.

Bright Future

``Just look around this place,'' Faisel Hoodbhoy, a managing director at Dubai International Financial Exchange, said at an Institutional Investor conference last week. ``The future for Dubai is very, very bright.''

Of course, doomsayers may have some ammunition in the ``skyscraper curse.''

There's an old saying in journalism that if you have a good story, write it from time to time. We all have a couple of favorite issues, causes or quirky lenses through which to view complex problems. One of mine is the uncanny correlation between tallest-building projects and financial crises.

It happened in Kuala Lumpur in 1997, Chicago in 1974, New York in 1930 and in biblical times with the Tower of Babel. A bizarre coincidence perhaps, yet humankind's propensity for architectural overreach has been a reliable omen of meltdowns.

Taiwan, which in 2004 became home to the tallest building, was arguably affected. Its economy didn't implode, so much as it's disappearing. China has done a masterful job marginalizing an island it sees as a breakaway province. Now, among Taiwan's main allies are Kiribati, Swaziland and the Holy See. An economic crisis? You decide.

Development Miracle

The thing about record-breaking skyscrapers is that they can say as much about hubris as wealth, ambition and technology. Is Dubai a development miracle? Or is it the center of an Arabian asset bubble tied to surging oil prices?

At least for the moment, it would appear to be the former.

The rise in oil prices may prove more secular than cyclical. Demand from China and India alone almost ensures it. Officials point out that oil revenue accounts for just 6 percent of Dubai's gross domestic product. Even so, it's not clear its banking and tourism industries would offset an oil crash. Luckily for Dubai, oil prices are likely to stay high.

Also, much of the oil proceeds are being invested at home. Dubai's boom isn't being financed with debt the way previous ones were in Asia and the West; it's being financed with something closer to equity, if you will -- shares in Dubai Inc.

Dubai Inc.

Speaking of equities, DP World Ltd., the Dubai-owned port operator with terminals from the U.K. to China, last week raised $4.96 billion in the Middle East's largest initial public offering. It was Dubai's biggest step to date in establishing itself as a global financial center.

Dubai is stepping up efforts to attract more IPOs. The small size of Dubai's stock market explains why so much money is flowing into property. Dubai is working to change things, including building a bigger bond market.

``It's going to be a bonanza for investment banks,'' said Henry Azzam, chief executive officer for the Middle East and North Africa at Deutsche Bank AG.

In a dangerous world filled with geopolitical risks, Dubai might be considered a ``Green Zone'' for Middle Eastern investment. Attracting cash from Muslim investors is only part of the push; another is attracting the biggest institutional investors from New York, London and Tokyo.

Boom and Bust

Yet oil booms have an erratic track record; just about every one has been followed by a painful bust.

The outlook for energy is cloudy as Venezuelan President Hugo Chavez and Iranian President Mahmoud Ahmadinejad try to use oil as a weapon against the U.S., and as concerns mount that the dollar will collapse or that the U.S. might attack Iran. Also, inflation in the U.A.E. rose a record 9.3 percent last year amid surging property prices.

To sustain the boom, Dubai needs to beat the system, so to speak; it has to overcome the skyscraper curse. Trouble is, few economies have done so.