A strategic location to create linkages with other countries, modern Dubai is a rich place to invest since it’s an oil-producing country and dominated its economy through petroleum industry. Its strategic location is situated between Africa and the Middle East and between the Far East and Europe making Dubai open to billions of consumers and investors. It is served by many shipping lines counting to 170 and 86 airlines that could be easily accessed by over 100 cities worldwide (Lowtax Library). Most of the labor force is comprised of Asians coming into the island since there are many businesses and working opportunities. With regards to Dubai’s business environment, companies that are entering the industry will not be deducted by any corporate or personal taxes but exceptions to this are for oil producing companies and branches of foreign banks. However, foreign companies are not permitted to own or acquire their own land, they only have to rent or lease for business purposes.
In this paper, we will discuss the understanding of Dubai’s investment and identify other market imperfection, liquidity, different forms of risks, and corporate lending and project finance that has an impact and influence in the local market of Dubai. Moreover, we shall address the discussion through a question to easily identify the business activities in Dubai.
How a foreigner thinks about Dubai as an investment opportunity?
Most of the investors in Dubai are confident in putting their money on business opportunities because they believe that costs of living, lands, and rents are much cheaper compared to other nations. Plus the quality of life is better. Dubai is a city of more opportunities and has good track record of strong economic growth in the last 20 years and still continue to attract foreign and regional inward investment. Some of the notable statements of businessmen regarding investing money Dubai is that the place has less traffic, beautiful mountains, good educational and health care facilities which all for much less cost.
Furthermore, property in Dubai is cheap on an international level though foreign ownership is at still in the process, Dubai is creating an international property market and introducing the freehold and are given a good deal to encourage them to lead the way. Tax free income is another advantage that hails workers and people to earn high tax-free salaries and can support higher house prices. Return for investors lead to properties steadily at the rate of 10% -15% per year and by 2009 it is estimated that the initial financial investment is expected to double based on current growth (Marr).
Against this positive background, what are the challenges for executives and investors? Does regional instability pose a threat? What are the trends in finance—and trading? Where are the obstacles to sustainable economic growth? Will the UAE government let Dubai remain a business-friendly zone? Will Dubai retain its status as a regional center for business? These are posing questions that could be a possible risk for investors. As of the moment, the UAE is very confident in giving the opportunity to Dubai’s growing economy and as a business-friendly zone compared to other nations of the UAE. Risks such as terrorism and international economic depression are more likely to strike if problems would arise.
Strategies are being developed like developing local laws and keeping faith with the international laws on market and business codes and ethics. New laws now permits investors to own the freehold of certain real estate in Dubai keeping them attracting more buyers to invest in overseas property. Though a major comment was placed regarding over expansion of large volumes it may have an over supply of real estate. To manage such possible risks, Dubai is working on building their tourism industry and massive monumental properties like the Dubailand for purposes of attraction to foreign tourists. Also, a massive building of cultural environment through the creation of the Dubai Cultural Village to launch performing arts centers, art museums, libraries, schools for music and dance and rare bookstores (Marr). Besides they are building premier locations to own luxurious overseas property by making high-rise skyscrapers and offshore properties.
Royal economy and rising industry
Twenty years of rigorous and extensive development, Dubai has made a landmark worldwide in attracting more and more investment. Earlier construction and expansion of small trading port created around the mouth of the Creek that progressed in the long run. Before, fishing ports was the only lying ports nearby village and extremely get bigger when a huge man-made port was constructed making it the biggest and largest free-trade zone in Arabia, the Jebel-Ali. Free zones are opened to 2350 companies from 97 countries including Japanese companies. The Jebel Ali Free Zone (JAFZ) was built to serve as a harbour on the shoreline to accommodate multinational companies in distribution and warehouse base and business in the Gulf and the Middle East.
With the sudden increase in the technology industry in the late 1990s, the government alone did not only built and establiShed a free zone for business purposes but also launched as of internet and media technologies and the creation of Dubai Internet and Media Cities (commonly referred to jointly as DIC) were successfully catered to everyone. The free zone for internet use is located along a two-kilometer stretch of the road west of the city center, in an area fast becoming Dubai’s new business district, the DIC has grown rapidly in the two years since its establishment, and now serves as a host to some big names like Microsoft, Oracle and Canon, McGraw-Hill, and CNN on the media side, even though the technology and media spending went down globally. Another huge industrial landmark that links the outside world is the Jebel-Ali International Airport and now named as Dubai World Central International Airport which amounted to US$8 billion. Industry-related is based fundamentally from petroleum product.
Petroleum is the central point of economy of the United Arab Emirates and is concentrated in Abu Dhabi and Dubai. They are still seeking help from the outside since industrial development is limited by a lack of trained persons who can divert the industry into a modern and high-technology oil-producing manufactures. Also, sources of raw materials are still lacking to sustain its production. Dubai is the current supplier to up-and-coming markets such as Central Asia, the CIS, South Africa and India (Lowtax Library). In the year 2002, the emirates of Dubai worked out a plan for the Dubai International Financial Centre (DIFC), a major financial association that links different investors and is supported by Deutsche Bank, HSBC and Standard Chartered Bank who signed up to be among the first residents of DIFC. The DIFC have made a mark in protecting the investors and create a freedom for single, logical framework which is recent and in contrast to older-established jurisdictions. It is expected that the DIFC will double the financial sector’s contribution to United Arab Emirates’ gross domestic product.
High rise buildings and shopping malls are now visible and hotel industry is now entering the hotspots of the country since more and more tourists are arriving. Although a small country with a small population, in the year 2004, the total non-oil imports made a spot of Dh 149,046 million and Dubai is the major re-export center for the United Arab Emirates. The gross domestic product of Dubai grew up to 64.5bn Dirham, about 15% between 1999 and 2001 and its non-oil foreign trade grew by 30%, about 111.6bn Dirham in the same two years (Foreign Direct Investment, 2003). Many of the economies of the United Arab Emirates development, consequently there are a lot of long term possibilities for diversification and expansion in the future.
The Gulf Cooperation Council (GCC) launched a summit conference in Abu Dhabi in 1981 and the United Arab Emirates was the founding member of the GCC. The members of the GCC include Saudi Arabia, Kuwait, Bahrain, Qatar, the Sultanate of Oman as well as the United Arab Emirates. Also, the country is a member of the League of Arab States, the Islamic Conference Organization, and the United Nations. On January 1, 2003, the combined customs region of the Gulf Co-operation Council brought into being, other nations include Kuwait, Qatar, Oman, Saudi Arabia, Bahrain, and the United Arab Emirates (including Dubai). Though past political issues were inclined with the Arabian nations, they are now open to agreements on free trade.
In the year 2006, Yemen has been in negotiations with the existing member states, and expected to sign up by 2016. The 15th Joint Council and Ministerial Meeting between the European Union and the six member states of the Gulf Cooperation Council in Bahrain took place on April.2005 concentrating on the situation of the free trade agreement negotiations between the European Union and the Gulf Cooperation Council. On this meeting, the European Union and the Gulf Cooperation Council agreed that the fast development and progress was necessary on a number of outstanding trade issues, specifically on services, industrial tax and tariffs and public procurement, and marked the significance of a speedy conclusion of the negotiations on human rights, terrorism, weapons of mass destruction and migration issues were also tackled. Economic boom and gloom is coming all the way for Dubai, its ambition is brilliant and any tourists or visitors will be struck by the pace of progress across the emirate. But re-export remains the major source of economic progress of Dubai despite its Muslim traditions and uncontrollably transforming the regional headquarters for technology, banking, media, aviation and shipping.
Unlimited opportunity is still expanding and rapidly growing, Dubai’s advantage becomes positive and long withstanding since free zones are offering absence of ownership restrictions. The government still not open to foreign ownership and unwilling to move on the ownership issue which makes the free zone remains in place. According to Obaid Al-Tayer, president of the Dubai Chamber of Commerce and Industry, “it’s too early to open up the economy completely – there is already happening in the free zone.” There are opposing forces at work in Dubai’s hallways of power. Given the fact that the UAE citizens representing less than 10% of Dubai’s population, the government is looking for steadiness between encouraging on foreign investors to put down long-term source, but not letting them acquire too much power or influence. But one local businessman warns of the fickle nature of most foreign investors. Even in the free zones, he says, “remember that most multinationals’ commitment only extends as far as a one-year lease (Foreign Direct Investment).”
Long rents are being put up for sale to foreigners in projects all across Dubai, like the Dubai Investments Park and Dubai Silicon Oasis. In these projects it appears that registration of long leases in support of foreign investors may not be allowed. It does not illegal for long leases in any way and form. They do not offend this Law or any Federal Law. Treatments are given to them in a different way for some reasons like (PropDubai):
- Unregistered leases remain personal rights, not rights in property rights.
- Unregistered leases are still capable of being inherited.
- Disputes arising between a landlord and a tenant of an unregistered long lease will still be adjudicated by the Rents Committee.
Subsidy for development and expansion
Since foreign investors are not allowed to own a property, income from land and property which was built up by Dubai’s former ruler Sheikh Rashid Bin Said Al-Maktoum, are keeping the land’s income more secured because investors are paying them good amount of money for the lease of the place. Also, the sale of oil and gas provide much of the fuel for this government-led expansion offering an estimated $5bn in yearly income.
Through the leadership of the ruling Al-Maktoum family, directed by Crown Prince Sheikh Mohammed Bin Rashid, are spending now with the aim of harvesting the benefits of a much diversified economy in the future. Though oil production has slowed in the past 20 years, subjective evidence from the buoyant economy suggests that this diversification strategy is paying off (Lowtax Library). Dubai’s self-reliant attitude to business is also noteworthy and remarkable, especially compared with the more refined and courteous federal capital Abu Dhabi, two hours drive down the coast. Furthermore, one of Dubai’s most difficult challenges is to put pressure on Abu Dhabi to speed up its approval of new legislation in Dubai which involves the formation of the Dubai International Financial Centre being a classic case in point without alienating the federal authorities.
Laws and policies concerning ownership and investment
Freehold is a concept that generally means possession and the most superior form of private property ownership. A freeholder is the absolute owner of the land and buildings stated in his title. The right to occupy, use and enjoy his property is entitled to the freeholder for a long term or until he sold it to other people or transferred to a new owner. Eventually, the freeholder’s heirs are entitled to inherit the title upon the death of the original holder of the title. According to the new law, Article 4, all nationalities other than UAE and GCC nationals can own freehold title which is comprised of a 99-year Lease or Usufruct right, as approval from the Ruler (PropDubai). The real estate are allowed to be purchased by foreigners only in the so-called freehold areas and in other areas a leasehold right of use applies for a limited period (PropDubai).
Business practices in Dubai are aligned with normal international standards. As a highly developed market, full technical requirements should be offered with CIF Dubai prices and Middle East references. The United Arab Emirates is a signatory of the General Agreement on Tariffs and Trade (GATT). As mentioned under Federal Law No.13 of 1988, as amended, financial records required to be kept to all businesses but current legislation is not specific as to the nature of such records. Three Federal Laws were enacted in the last quarters of 1992 on the protection of industrial and intellectual property. These laws came into effect in 1993 and provide protection against commercial piracy and fraud.
It includes Federal Law No. 37 of 1992 on Trademarks, Federal Law No. 40 of 1992 on Protection of Intellectual Property and Copyright, and Federal Law No. 44 of 1992 on Protection of Industrial Property. To guarantee the business in the United Arab Emirates in a fair and orderly manner, there is a comprehensive framework of legislation. There are laws dealing with commercial transactions, intellectual property, labor and other characteristics of business connections.
In September 2005, Khalaf Al Habtoor, member of the Dubai Economic Council, disclosed that the UAE’s Ministry of Finance and Industry was putting the finishing touches to new company laws (Lowtax Library). The legislation being completed and finalized by the UAE authorities will amend partnership rules, foreign ownership thresholds and IPO rules. Under present rules, when a company decides to propose on the stock market, it must record at least 55% of its shares, leaving its former owners holding a minority stake but this has led many family-owned enterprises to avoid listing (Lowtax Library).
Potential risks in the market
All the emirates including Dubai are willing to fascinate and create a center of attention to foreign investment. However, on the part of the investors a possible complication and obstacle to foreign investment is the federal requirement that investments must be on a joint venture basis with the local partner owning at least 51% of the business enterprise. The exception is investment in the free trade zones where 100% foreign ownership is allowed. In various stages of development in UAE during the year 2002, it was comprised of 11 free trade zones. A number of percentage like 100% import and export tax exemption, 100% exemption from commercial levies, 100% repatriation of capital and profits, multiyear leases and other services, including assistance with recruiting labor were provided (Nations Encyclopedia).
Currently, financial investors from different parts of the world are experiencing at least good signs of cash flows and earnings from investment. Positive flow of tourism and shareholding companies keeps on moving to the frontline and continuous creation of employment and powerful engine of business since there are no foreign quotas, tax, exchange controls and trade barriers. However, risks on the side of investors are definitely unmanageable. Such risks include lending money, market risk, and international risks. Competition among different investors will extend and complication since Dubai is a small nation to attract big investment. Moreover, businessmen are not permitted to own properties and are only allowed to lease or rent locations of their business. Few thorns to ponder for businessmen are the rising cost of leasing and renting since foreign ownership is not allowed.
That means a majority share of the business will always be seized in UAE hands and uncertainty about what would happen to that minority share in the occurrence of commercial disagreement in the future. For a while, investors are enjoying and putting huge trust in Dubai by acquiring a local to put their name on the ownership deed. All are having faith in economic prospects and security and transparency for their investment (Lowtax Library). Furthermore, international risks are also important to consider since global politics and world trade is intensely unpredictable and another factor that could contribute to risk is the aggression which is prevalent in many nations with interests in oil-producing countries. International markets will be affected from the instability of economic and political situation when facing a huge dilemma.
- Foreign Direct Investment, 2003. Dubai: an ambitious emirate . http://www.fdimagazine.com/news/fullstory.php/aid/297/Dubai:_an_ambitious_emirate.html
- Heritage Foundation. United Arab Emirates. http://www.heritage.org/research/features/index/country.cfm?id=unitedarabemirates
- Lowtax Library. Dubai Information: Business, Taxation and Offshore. http://www.lowtax.net/lowtax/html/dubai/jdbcfir.html#ben.
- Marr, Nicholas. Go-Estates. 2007. Savvy Investors look beyond Dubai. http://go-estates.com/blog/index.php?year=2007&month=2
- Nations Encyclopedia. United Arab Emirates Foreign Investment. http://www.nationsencyclopedia.com/Asia-and-Oceania/United-Arab-Emirates-FOREIGN-INVESTMENT.html
- PropDubai. The New Dubai Property Law-Part 1. http://propdubai.com/articles/14/index.php