In the shadow of the twin pinnacles of the Emirates Towers, the most iconic of the dozens of skyscrapers which now align Sheikh Zayed Road in central Dubai, a brand-new financial district is gradually being assembled.
Overlooking this 110-acre site, which is still dotted with cranes and buses ferrying around legions of construction workers, stands a futuristic cube-like building whose intended role is to become the heart of the region’s financial arteries.
The “Gate” — more than a little reminiscent of the Défense arch which dominates one of Paris’s key business districts — is the showpiece of the first phase of the Dubai International Financial Center (DIFC), an expansive and ambitious government-led venture, which aims to put the Emirate firmly on the world’s financial map.
The DIFC wants to house many things under one roof: an independently-regulated regional base for financial services firms; a world-class securities market; an commodities trading platform; an international investment arm; and a free zone.
Some of these goals are closer to being achieved than others, and the jury is certainly still out as to whether Dubai can one day seriously compete with London or New York as one of the world’s major financial centers.
But such an ambition hardly sounds out of place in the city which regularly recites its desire to be a “hub” for most things, and the consensus is that enough big names have now signed up to the DIFC that Dubai may well emerge as one, if not the, financial powerhouse of the region.
Trying to take the lead
With economic diversification on the lips of decision-makers in the Gulf, and more and more wealth being invested back into the region instead of Europe or the US, there is much at stake for those countries competing to become a financial player.
“All of the region’s financial centers are doing very well right now, which is hardly a surprise when you look at the pace and scope of economic growth in the GCC,” says Simon Williams, chief economist at HSBC Bank Middle East in Dubai.
“Each center is pursuing its own particular model, with Dubai trying to position itself as a regional hub and, longer-term, as a player within the international financial system, too. To a large extent, it’s been a success.”
If one were to take one of the DIFC’s immediate primary functions, which is to establish the leading base for major financial services companies operating in the region, then it has certainly managed to attract an impressive clutch of A-list multinationals.
Since the first company inked its name in September 2004, the DIFC Authority has issued licenses to some 420 firms, with noteworthy new additions for 2007 including Halliburton, Goldman Sachs, Calyon, Schroders, Barclays and Merrill Lynch.
“When we looked to open an office in the GCC, we had three candidates: Bahrain, Doha and Dubai,” says Naoki Tamaki, Representative at the Japan Bank of International Cooperation, which opened its DIFC office in September 2005.
“Bahrain was attractive because it already had long experience in the financial sector, particularly in terms of banking regulations, whilst Doha has the Qatar Financial Center,” Tamaki told Executive.
“We chose Dubai because there was a large rise in the number of Japanese businesses established here, there was a good level of infrastructure, and because it was already a logistical hub for the region.”
Free for all
Like the many other free zones in the UAE, the DIFC can offer its members full corporate and income tax exemptions, as well as 100% foreign ownership and no restrictions on the repatriation of capital. Under present regulations, non-free zone companies locally established in the UAE market must be at least 51% owned by an Emirati partner.
This independent status means that the DIFC has attracted not only financial services providers and related firms, but also marketing companies, real estate developers and others for whom it makes sense to be based in Dubai’s emerging business district. Moreover, most of the other free zones in the Emirates tend to be either geographically isolated from the emerging city center, as is the case with Jebel Ali, or are too industry-specific, a label which applies to Dubai Internet City or Dubai Media City.
The DIFC is also independently regulated by the Dubai Financial Services Authority (DFSA), a body which drew up specific rules for the DIFC based on international practice laws. Unlike the other bourses in the UAE, for example, the DIFC does not come under the regulatory jurisdiction of the UAE Central Bank or the Emirates Securities and Commodities Authority.
Yet while the DIFC has issued hundreds of licenses, the physical infrastructure is far from being ready, with a number of licensees citing delays in finding commercial space and subsequent hold-ups in relocating their staff to Dubai from other offices.
Once the infrastructure is complete, though, the DIFC wants to evolve into a fully-functioning business district with its own hotels, serviced apartments and transport system. Construction is being phased, with the Gate and the surrounding buildings representing a first stage. By 2010 there should be four million square feet of office space, as well as hotels, serviced apartments, bars, restaurants and some 31,000 car parking spaces.
Setting up shop
The fees payable to the DIFC Authority for incorporating a new company in the centre, or opening a branch of an existing firm, are not particularly onerous, and average around $2,000, plus an annual commercial license of $3,000.
However, the rub comes when calculating the actual cost of doing business in Dubai itself, which is certainly higher than Bahrain or Saudi Arabia, even if Doha is rapidly catching up on Dubai as one of the most expensive places in the world to live and work.
The costs of renting an office in Dubai were the 10th highest on the planet in 2006, according to a report by property consultants Cushman and Wakefield.The DIFC Authority says that current annual rents are $82 per square foot, although in some cases it is thought the companies which signed up early on benefitted from preferential rates or locked-in, long-term contracts which mean they now pay far less than market costs.
Nor do staff come cheap. According to a 2007 Mercer Human Resource Consulting report, Dubai is the most expensive city to live in the Middle East, after Tel Aviv. It was ranked in 34th place worldwide, although had dropped down the rankings largely due to the slump in the US dollar, to which the UAE dirham is pegged.
Offering large enough packages to lure world-class talent to Dubai is therefore a strain on budgets, but spending the extra pennies could still be worthwhile in terms of competing in what is an increasingly busy marketplace.
“Financial services companies are relocating greater numbers of their staff here from more established locations, and even if the cost of living and operating in Dubai continues to rise, they are choosing to come here in order to compete effectively in the market,” says HSBC’s Williams.
“A lot of the services that would previously need to be handled outside of the region can now be done in Dubai itself — the days of suitcase bankers are largely over,” he says.
Moreover, as many international firms with offices in Dubai point out, there are also many important “soft” reasons why the Emirate offers a more attractive lifestyle than its regional competitors.
“We also took into account that Dubai is an easier place to live than other GCC cities,” says the JBIC’s Tamaki. “Although if Saudi was to relax some of its business and lifestyle restrictions, then I think many companies, particularly banks, would open in Riyadh.”
Eggs in many baskets
As well as trying to attract investors with the wider Dubai “package,” the DIFC strategy also wants to bolster its credibility through the various subsidiaries which fall under its umbrella, not least of which is the Dubai International Financial Exchange (DIFX).
The exchange, which began trading in September 2005 amid much PR fanfare, set out with the ambition of becoming a state-of-the-art securities trading platform, straddling the markets of the East and West and offering the same regulatory sophistication as London or New York.
But it has so far failed to live up to expectations, and despite the growing number of Islamic bonds listed on the exchange, trading volumes have been disappointing,
Another division of the center, DIFC Investments, has been busier. Acting as the DIFC’s investment arm — and the sole shareholder of the DIFX — it listed a $1.25 billion sukuk bond on the exchange in June to fund its ongoing international acquisitions in the financial sector.
The latest of these was a 2.2% stake in Deutsche Bank in May, which made the DIFC the largest institutional shareholder in the German bank, whilst at the time of writing there was also speculation over the possibility of a bid for OMX, the Scandinavian bourse.
Lots of energy
One of the newest entities of the DIFC to come into operation, meanwhile, is the Dubai Mercantile Exchange (DME), an energy commodities exchange which wants to lead the way in trading crude oil futures contracts within the region.
The DME is a partnership between Tatweer, a member of the state-owned Dubai Holding Group, the Oman Investment Fund (OIF), and the New York Mercantile Exchange (NYMEX). It launched operations on June 1st with an initial listing of Oman-based oil contracts.
“I am very pleased with the contract volumes and open interest so far, having set records on the second, third and fourth day of trading,” Ahmad Sharaf, the DME’s Chairman, told Executive. “After only 12 trading days, we reported an exchange-wide open interest of 5,414 and upon the conclusion of 15 days of trading the DME surpassed 50,000 contracts traded.”
“As our contract continues to trade in larger volumes and open interest continues to grow, the market will become increasingly comfortable with the DME as a concept and its futures contracts as better risk management tools. The DME recognizes that some customers may wish to wait for certain milestones or volume thresholds, but I am very confident that the DME is well on its way of establishing a global benchmark for Middle East sour crude shortly.”
Sharaf says that the DME can also try to find a niche by benefiting from the time difference between Europe and Asia and providing a hub for energy futures, options and other products such as jet fuel.
The way forward
The DIFC is a long-term project, and one point cited by a number of firms is that it has taken longer than expected to develop. Many challenges still remain.
“There are still teething problems, largely because the DIFC is still relatively new and lacks a long period of experience,” says Tamaki of the JBIC. “Many improvements have been made in terms of the regulatory environment, for instance, but occasionally some regulations will still be altered by the authorities without sufficient warning or consultation.”
Others say that the broader regional problems of transparency and poor corporate governance are limiting listings on the DIFX, with local companies unwilling to conform to the same strict rules and regulations which govern more developed stock exchanges around the world.
But as a financial district the DIFC is already ahead in regional terms, feeding off the wider population and service-sector growth in Dubai and enjoying a first-mover advantage above places like Qatar or Saudi Arabia. Above all, there is a perhaps an urgent sense that this is a race against the clock.
“It is essential that Dubai makes this work,” says
HSBC’s Williams. “Unlike Qatar, it cannot rely on massive natural resources to sustain future economic growth, so developing the financial services sector into a regional or even global player is particularly crucial.”
