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As Dubai’s economy rebounds, so do all its bad habits

Dubai’s economy is roaring back to life, and so are the careless bets that got it into trouble.

Dubai’s economy posted its best performance in 2012 since five years ago, growing 4.4%. By comparison, its GDP grew 3.6% in 2011 and 3.5% in 2010. The twin pillars of Dubai’s growth were the hospitality industry and the manufacturing sector, which grew 17% and 13% respectively in 2012. In response, Dubai’s benchmark index has rallied over 45% so far this year. Meanwhile, the emirate’s credit default swaps, a measure of the riskiness of the economy, have dropped by over 50% in the last year.

The optimism has spurred a run up in real estate prices, which dropped 50% after the financial crisis. According to a Knight Frank report, property prices increased 21.1% in the first quarter of 2013 compared to the same period last year. Studies conducted by Jones Lang LaSalle show that vacancy rates in the first quarter fell 400 basis points, while rents increased 4.6% year-on-year.

Recent mega-projects include the Mohammed Bin Rashid City, slated to become the world’s largest shopping mall, more than 100 hotels, 1,500 luxury villas and an enormous public park. The City project will be part of the retail district announced last November by Dubai’s ruler, Sheikh Mohammed Bin Rashid Al Maktoum. Another example of overzealous investing: plans for a $1.6 billion luxury resort to be built on a man-made island, including plans to build the world’s tallest ferris wheel, Dubai Eye.

Global property consultant CBRE has warned that Dubai’s property market needs tighter regulations to maintain its status “as a burgeoning global business environment.” But Dubai’s real estate regulators don’t appear concerned. Marwan Bin Ghulaita, CEO of the Real Estate Regulation Authority, went to the has said that “a certain amount of speculation is acceptable. If we say 20%, or 10% [of the market] is speculation, it is always OK for the market, because there will always be first-comers.” To curb speculation, real estate developers are securing at least 20% of the funding in advance, he said, and he added that investors must “do their homework.”

Personal debt levels are also rising in Dubai and the other six quasi-independent emirates that make up the United Arab Emirates. Personal loans increased 3.1% from January to April of this year, more than double their growth rate during the same period last year. The spike prompted the central bank to impose a three-month ban on “loan-shopping,” the practice of transferring loans between lenders. Non-governmental organizations such as the Emirates Foundation have launched campaigns to improve financial literacy for the young.

Apparently, it doesn’t take long to forget $100 billion in debt when the money comes rolling back in.

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