Petrodollars: Investing in Dubai's property boom

Dan Denning - Wed 22 Nov, 2006

..."Petrodollars" are fuelling a massive building boom. Publicly traded infrastructure companies, therefore, stand to make handsome profits over the next few years...

 
 
- When the ruthless Pharaoh Khufu commissioned the Great Pyramids of Egypt, no one dared to ask why. The pharaoh had the money and the power...and so three massive pyramids emerged from the dessert sands near Cairo.

- A similar story is unfolding today in Dubai, and throughout the Persian Gulf region. But the "new pharaohs" are commissioning multi-billion dollar real estate developments instead of pyramids. "Petrodollars" are fuelling a massive building boom. Publicly traded infrastructure companies, therefore, stand to make handsome profits over the next few years.

- Recent charts have appeared in a research report by UBS entitled, "Petrodollars: where are they and do they matter?" We're not sure where the petrodollars are, but we're quite sure they matter. According to the official statistics, the dollar flows generated by the oil trade are NOT all showing back up in the US Treasury Market. So where are they showing up? In gaudy real estate developments in Dubai, for one thing.  

- "Palm Jumeirah" is one high-profile example. Palm Jumeirah was once the world's largest construction site—bigger, even, than anything going on in China. But you have to build big when you think big. And there's not much bigger of an idea than creating a residential and commercial island in the shape of a date tree with seventeen fronds, and dredging 80 million cubic meters of mud from the Gulf of Arabia to do it.

- And yet Palm Jumeriah is but the first, and not even the largest, of the four projects Dubai has in mind. The others—Palm Jebel Ali (an artificial island developed in the shape of a world map), and Palm Deira—will be even larger and more audacious.

- The whole development is being called by its backers, the 8th Wonder of the World. Palm Deira, if and when it's ever completed, will be 14 kilometres long and eight and half kilometres wide, creating eighty square kilometres of commercial, residential, and surreal space where none existed before.

- Whether this is visionary — effectively turning resource wealth into capital - producing assets that last longer — or the most colossal and inefficient use of capital in human history, is an intriguing debate. Alas, it is beyond the scope of this story. And the truth is, it doesn't matter. These things will be built.

- The logical investment question is simple: who will build them? Who are the proverbial "pick and shovel companies" of the Arab world's great building boom?   

- "With pure global infrastructure demand in the next decade estimated to be well in excess of $8 trillion and with one billion new inhabitants projected to populate the planet in the next 14 years, it has been suggested that this has the potential to create a US$20 trillion plus capital requirement in the near term," says Ernst and Young's Director of Global and Americas Real Estate, Mr Dale Young.

- Allowing for a good bit of self-serving hyperbole, even a smaller portion of $20 trillion in global infrastructure spending is a big number. Big enough, at least, to have our full investment attention.

- In point of fact, not only is the Arab world sitting on a pile of cash, it is growing. The GDP of the 22-member Arab League, according to the Associated Press, exceeded $1 trillion for the first time ever at the end of 2005.

- Look out for the many infrastructure firms that may prosper during the coming infrastructure boom.


Regards,

Dan Denning
for The Daily Reckoning