As Oil Riches Gush, a Sheik Loosens His Grip on Economy

Abu Dhabi Allows Land Sales
To Keep Cash at Home;
Stock Market Takes Off
Maintaining a Hold on Politics
By ANDREW HIGGINS
Staff Reporter of THE WALL STREET JOURNAL
October 21, 2005

 

ABU DHABI, United Arab Emirates -- When he was just 5 years old, Ahmed Ali Al Sayegh received a small plot of land from the ruler of this Persian Gulf sheikdom. But like all land here until earlier this year, the gift had a catch: He couldn't sell it.

 

Now 43, the U.S.-educated businessman stands in the vanguard of a quiet revolution that is dragging this sheltered realm further into the global economy: He's hawking real estate as chairman of Aldar Properties. This summer, the company put up for sale 290 as-yet-unbuilt villas in what it promises will be a sumptuous subdivision rising from the desert scrub. They sold out in 45 minutes. Interest in a second batch was so strong, Aldar held a lottery, billed as an "audited draw" to mask the whiff of gambling, which is banned by Islam.

 

 
"There was a big demand for change," says Mr. Al Sayegh.

 

The sale marks a sharp break with the past here in Abu Dhabi, which has long been cushioned from modern ways by feudal fealty and copious supplies of oil. And it highlights a novel feature of the current oil boom. When oil prices surged in the 1970s, economies across the Gulf -- which holds about two-thirds of the world's oil reserves -- were mostly state-controlled. Equity and property markets barely existed. Banks were fragile and often just offshoots of the government.

 

Today, the state, while still firmly in control of the political realm, is loosening its grip on the economy. Primed by petrodollars, local markets and private businesses are booming across the region, unperturbed by mayhem in Iraq.

 

The economic resurgence has powerful, but mixed, consequences for the U.S. Continued stability outside Iraq buys time for the Bush administration's experiment in democracy-building there. Still, the prosperity and growing economic opening in tightly run sheikdoms like Abu Dhabi offer a competing model to the U.S. vision of opening the political process across the region.

 

Big oil-exporting countries are still stashing much of their surplus cash in U.S. and European securities, but they're also looking closer to home for ways to multiply their already massive windfall. Abu Dhabi's stock market is up by over 100% this year and Saudi Arabia's by more than 80%.

 

With around 8% of the world's proven crude reserves, Abu Dhabi can keep pumping at or above current levels of more than two million barrels a day for well over a century. It's roughly as rich as the U.S., as measured by per capita economic output. As surging prices for oil on global markets bring yet more wealth, the emirate wants markets to prevail at home, too.

 

"There is a shift in philosophy," says Eirvin Knox, the American chief executive of the Abu Dhabi Commercial Bank, which saw profit jump 98% last year.

 

The richest and biggest of seven desert monarchies that make up the U.A.E., Abu Dhabi this spring lifted a ban on property sales by citizens and recently told foreigners they can buy leaseholds -- essentially leases for exceptionally long terms -- in selected areas. It's also trying to slim down a sclerotic government bureaucracy, which employs nearly 90% of the native-born work force. The government this summer hired a French company to take over garbage collection from Abu Dhabi city hall and is privatizing chunks of its water and electricity sector.

 

For years, Abu Dhabi's municipal land registry was a sleepy bureaucratic outpost piled with dusty bound volumes recording plots of land given away by the ruler. Now, scores of people who want to register new purchases besiege the office of Hussein Abdullah. "It was less tiring before," says Mr. Abdullah, who must sign off on each land deal. A new computer system is being set up to manage the flood of sales.

 

The explosion of interest in real estate here and across the region has led some to warn of a speculative bubble. Those who pushed for new land-use rules say it merely reflects the strength of pent-up demand.

 

In recent years, Abu Dhabi has been largely overshadowed by Dubai, a brash, neighboring emirate that has become the region's main commercial and transportation hub. With only modest revenue from oil to fall back on, Dubai turned much earlier to other ways of generating cash such as property sales.

 

There are some signs that the same dynamic is also beginning to take hold in Saudi Arabia, the world's biggest oil exporter. The kingdom has relaxed its own property regime. It signed a free-trade agreement with the U.S. in early September and hopes to join the World Trade Organization later this year, a move that would commit it to more market opening.

 

A big question now is whether the economic moves will trigger pressure for political changes, too. Saudi Arabia earlier this year held elections for local councils and, in a symbolic retreat from feudal habits, the new monarch, King Abdullah, has told citizens to stop kissing his hand.

 

The U.A.E. has so far shown scant interest in any political overhaul. Anthony Harris, Britain's ambassador to Abu Dhabi in the 1990s, says a big reason is that more than 70% of residents are foreigners and demand for change is minimal. While ambassador, he says London often asked him about opposition groups. His reply: "Look boys, you will find this difficult to believe, but there is no opposition."

 

Political Change

 

Today, amid continuing turmoil in Iraq, the U.A.E. is widely seen as a countermodel -- successful, stable and singularly undemocratic -- of America's vision of Arab democracy. Nonetheless, political change is under discussion, says Mr. Al Sayegh, the Aldar Properties chairman, who is also head of Dolphin Energy Ltd., a natural-gas venture. Elections, he says, "are clearly not impossible."

 

Abu Dhabi's shift is partly the result of a change of generations. Its octogenarian ruler, Sheik Zayed bin Sultan al-Nahayan, died last November. A benign autocrat who governed for nearly 40 years, he cemented his authority with generous handouts of land, cash and other riches. Gifts of land were a pillar of his rule, and he insisted that "not a single grain of sand" be sold.

 

 
Among the many early recipients of the ruler's largesse was Mr. Al Sayegh, then still a boy. He got an 80-by-100 foot plot, which he kept until the 1980s, when the government wanted it back for redevelopment. As compensation, he got a bigger plot near a mammoth mosque named after Sheik Zayed. He lives on the same land now.

 

German-born Frauke Heard-Bey, a longtime Abu Dhabi resident who has written a local history, says this curious land system grew out of tribal custom and was never formally enacted as law. "You didn't need to write it down in decrees because everyone knew that to get a piece of land you had to go to the sheik," she says. Transferring ownership also required going to the sheik, who sometimes allowed impoverished widows and others desperate for cash to sell their land.

 

When Mr. Al Sayegh got his first plot, Abu Dhabi was just starting to develop its oil industry and had a population of around 46,000. It had just four doctors and five schools. (It now has over 1.6 million people, 19 hospitals and nearly 500 schools.) "If you were very rich, you had mud [houses]. If you were not rich, you had reeds," says Mr. Al Sayegh, who grew up in a relatively well-to-do trading family that got its start selling pearls, Abu Dhabi's big export commodity before petroleum. Unlike most locals, who are Sunni Muslims, he is a Shiite.

 

By retaining an effective monopoly on land distribution, Sheik Zayed kept in check the disruption caused by Abu Dhabi's transformation from fly-blown poverty to dazzling wealth. It ensured that native-born Arabs -- who were rapidly becoming a minority in their own country -- got land and prevented outsiders and rich locals "from buying up the whole place," says Ms. Heard-Bey.

 

To husband the massive flow of revenue following the 1973 oil-price surge, Sheik Zayed in 1976 set up the Abu Dhabi Investment Authority, known as ADIA, which invested heavily in real estate abroad. At the same time, the government tightened control of property at home, setting up an agency to provide billions of dollars in loans and supervise the building and management of properties for citizens.

 

With plenty of cash still left over, Abu Dhabi in the 1970s and '80s funded development projects elsewhere in the U.A.E. and overseas. It also funded the Bank of Credit & Commerce International, which collapsed in a cloud of scandal in 1991. Abu Dhabi owned at least 77% of the disgraced bank, much of it through ADIA, the investment authority.

 

When the U.S. Senate opened hearings on the BCCI debacle in 1992, Abu Dhabi's royal family sent Mr. Al Sayegh to Washington to testify. A graduate in economics from Lewis & Clark College in Oregon and then a finance director for Abu Dhabi National Oil Co., Mr. Al Sayegh says he was chosen because he had "nothing to do" with BCCI, which made it difficult for him to answer many questions. A Senate report accused Abu Dhabi of stonewalling. This, says Mr. Al Sayegh, was unfair and "did not reflect all our cooperation."

 

The mess, he says now, taught Abu Dhabi an important lesson. "Investments can be a source of menace," he says. "We are very careful in that sense now."

 

By the end of the 1990s, as oil prices plunged to around $18 a barrel, Abu Dhabi, under pressure from the International Monetary Fund, was getting more careful with its spending at home, too. Though still wealthy, it began to trim some of its generous subsidies, which by last year had been cut in half to around $2 billion from $4.1 billion in 2001, according to a recent IMF report. The ruling family also probed ways to bring in more foreign investment.

 

A Plan Fizzles

 

Its most ambitious plan was the Saadiyat Free Zone Authority, an attempt to create a free-market financial and commodity center on a sandy island. The much-hyped plan fizzled. So, too, did a proposal to build a theme park and resort on a man-made breakwater known as Lulu Island.

 

As Abu Dhabi stumbled, nearby Dubai raced ahead, propelled in part by its decision in 2002 to allow property sales to locals and, in certain areas, to foreigners, too. This ignited a big investment and building boom.

 

By last year, according to IMF figures, hydrocarbons such as oil and natural gas accounted for only 6.1% of Dubai's economic output. They made up over 50% of Abu Dhabi's much bigger gross domestic product.

 

As Sheik Zayed grew increasingly infirm -- he had a kidney transplant in Cleveland in 2000 -- most decision-making fell to two of his 19 sons, Sheik Khalifa, his eldest male offspring, and the much younger Sheik Mohammad. They pushed privatization and other market-friendly measures.

 

Pressure built, too, for change in Abu Dhabi's antiquated land regime, which had grown increasingly unwieldy as the economy developed and the population became richer and better educated. In spring last year, Mr. Al Sayegh became chairman of Addar Real Estate LLC, and set about turning what had been a project manager owned by government agencies into a private-property developer. The company went public under a new name, Aldar. Addar and Aldar are variant spellings of the Arabic word for "Home."

 

The death of Sheik Zayed in November briefly delayed plans for an initial public offering in Aldar, but it didn't damp torrid interest: The IPO held soon afterward was 472 times oversubscribed. A 55% equity stake in Aldar sold for $230 million. A second new property firm, Sarouh Real Estate, also went public and was also hugely oversubscribed.

 

"The government in the past built everything. It made a big shift," says Mr. Al Sayegh. Still, the offerings were open only to citizens of the U.A.E.

 

In March this year, Abu Dhabi's new ruler, Sheik Khalifa issued a decree granting citizens the right to buy and sell land. In August, he signed Law No. 19, which formally abandoned the old property regime and permitted the sale of freehold rights by citizens and in certain areas 99-year leaseholds by foreigners.

 

In a hotel ballroom on the outskirts of Abu Dhabi city, Aldar in June put its first real estate on the market, villas in a development called Raha Beach, on land donated by the government. None of the units sold so far will be ready until late 2006 and none have a beach.

 

Nonetheless, hundreds of locals lined up all night in the hope of making a purchase.

 

Falah Mohammed Al Ahbabi, a 28-year-old investment company manager, went to the hotel after dawn prayers. Though arriving relatively late, he got lucky: Many of the people waiting overnight were groggy from exhaustion when sales started. He got ahead of them and brought three properties costing around $400,000 each, putting down a 15% deposit. He already has a plot of land -- granted two years ago by the ruler on the occasion of his marriage -- but wanted more real estate as an investment. "Everywhere in the world property is a secure investment," he says. "But here the property market was closed. Now we have fresh blood."