How one of the world's wealthiest cities went from super-boom to bust
There were once great things planned for Saadiyat Island, a sandy atoll located just off the coast of Abu Dhabi, the capital of the oil-rich nation of the United Arab Emirates.
Frank Gehry, the famed American architect, was chosen to design a sweeping, sinuous building that would house a branch of the Guggenheim Museum. A state-owned development company signed deals to open a satellite branch of France's Louvre and to build a sprawling, falcon-shaped complex that would serve as the UAE's first national museum.
UAE officials envisioned the museums as the cultural centerpieces of a $27 billion tourist destination incorporating restaurants, high-end condos, and luxury resorts.
Five years later, work crews have yet to break ground on any of the museums, and the UAE's state-owned Tourism and Development Co. announced late last year that it was indefinitely suspending the Louvre and Guggenheim projects. On a recent visit, small boys could be seen playing soccer on the flat area of the island's coast that had been earmarked for the two Western museums.
"The Abu Dhabi building we've been working on in the last five to six years has been stopped, and that's painful," Gehry told Bloomberg News last winter.
Saadiyat is Arabic for "happiness," but the island's travails illustrate a broader, and decidedly unhappy, emerging trend. Abu Dhabi is the wealthiest city in one of the wealthiest countries, and it had long seemed immune to the global financial crisis ravaging Europe and the United States. But the city's economy is finally showing clear signs of deterioration, prompting the first budget cuts in years and threatening the future of Saadiyat and other ambitious projects.
As in so much else of the world, the main culprit is the real-estate sector. Private and state-owned developers built scores of skyscrapers, office buildings, apartment complexes, and gated communities over the past five years, banking on an expectation that Abu Dhabi's population would spike as expatriate business people flooded the city because of its oil, lack of taxes, and safety.
But the economic slowdown in Europe and the U.S. dramatically reduced both the numbers of corporations choosing to expand into the UAE and the numbers of tourists able to afford the high price of vacationing here. That, in turn, has led to a glut of empty buildings and hotel rooms, decimating the city's tourism and real estate markets and dragging down its broader economy.
"The economy of Abu Dhabi is unsustainable," said Nasser bin Ghaith, a British-trained economist in neighboring Dubai. "Every major project in Abu Dhabi begins with petrodollars spent by the government, but at some point these companies have to stand on their own, and they haven't been able to do so."
The slowdown is forcing Abu Dhabi's government to bail out high-profile businesses like Aldar Properties, a major developer that built the city's Formula One race circuit and Ferrari World theme park. The city's government spent nearly $10 billion last year on various forms of financial assistance to Aldar, which is partially state-owned, retiring some of its debt and buying some of its unfinished or underperforming properties, including both the race track and the amusement park.
Still, it's far from clear that the Abu Dhabi government can wring more out of Aldar's projects than the developer itself. Ferrari World and the Formula One circuit are situated on Yas Island, which had been envisioned, like Saadiyat, as a major tourist attraction. Tourists have largely stayed away, however, because of its distance from downtown Abu Dhabi. Stars 'n' Bars, an American-style restaurant overlooking the water, was empty during a visit earlier this week except for a group of heavy-drinking Eastern Europeans taking turns mangling love songs on a karaoke machine. Nearby hotels also appeared largely deserted.
To be sure, Abu Dhabi's troubles pale next to those of neighboring Dubai, whose financial recklessness--symbolized by the construction of an expensive indoor ski slope--forced its rulers to request a $20 billion bailout from Abu Dhabi in 2009.
Dubai suffers from a growing overabundance of office space and residential properties. More than a dozen skyscrapers remain empty; at night they loom, entirely dark, over several newly built stretches of the city. Both native Emirati and expatriate residents of Dubai are so heavily indebted that UAE newspapers carry regular stories about members of the two groups leaving abandoned luxury cars in the city airport's parking lot as they flee the country.
Abu Dhabi officials say they remain committed to a planned $500 billion investment in tourism, industry, and other initiatives designed to gradually shift the city's economy from a near-total dependence on oil.
That may not be possible if current trends continue. Financial analysts here say that rents in Abu Dhabi have plummeted by 40 percent since their peak and are expected to drop 15 percent more this year; the declines are pushing numerous developers to the brink of bankruptcy. The company charged with building the Louvre and Guggenheim said that its budget will likely fall by close to 30 percent this year, raising questions about if--or when--work on the museums will resume. A planned MGM Grand hotel was recently delayed indefinitely.
No analysts expect Abu Dhabi's economy to collapse or even deteriorate as significantly as has Dubai's. But they also don't expect a quick recovery. The UAE's long boom may not quite be over, but the party appears to be winding down.