A battery of fireworks marked the climax of the $20 million grand opening ceremony for the $1 billion Atlantis Hotel. Flashes of red and white illuminated dozens of construction cranes, which have become fixtures in this glittering Gulf city amid a decade-long, trillion-dollar building boom.
But the frenzied pace of development in Dubai and elsewhere in the United Arab Emirates is grinding to a halt and the over-the-top extravagance on full display late last month at places like the new Atlantis, at the tip of one of Dubai's three man-made, palm-tree shaped island archipelagos, may soon be a thing of the past.
The global financial crisis has brought construction to a stop as developers put projects on hold, lay off workers, and scale back several high-profile ventures.
And although Dubai's economy is not based on oil wealth, it's efforts to become the service hub for the Gulf region means it very well may feel the effects of falling oil prices (around $47 a barrel Wednesday) worse than its sister city, Abu Dhabi, which is cushioned by its possession of 10 percent of the world's petroleum reserves and a massive sovereign wealth fund.
The global credit crunch and investor uncertainty has led real estate prices to drop and Dubai's stock exchange to nosedive in recent weeks.
The Dubai Financial Market has lost nearly 70 percent of its value since the summer. Leading that loss have been real estate companies. Dubai's Emaar Properties, builder of the soon-to-be tallest building in the world, the Burj Dubai, has lost 75 percent of its value since January on Dubai's exchange.
The real estate industry, including construction, makes up an estimated 30 percent of Dubai's economy. Apartment and villa prices in Dubai, on average, had doubled since the beginning of January 2007. But now real estate agents like Jean-Pierre Sedaghat say some premier property prices have dropped as much as 50 percent. Before the crisis hit, apartments in the Burj Dubai averaged about $1.7 million.
"At the beginning of Dubai, it was in one day you can buy the property in the morning and sell it in the afternoon," says Mr. Sedaghat. He says sales are down 40 percent from last year.
"The real estate market has stalled," says Paul Allen, who runs the website and blog Estateagentsdubai.com. He released a survey of more than 100 real estate agents in Dubai last month in which half said they hadn't sold a property in the past month.
Mr. Allen, who sat in the palatial Emirates Mall where shoppers gawk at skiers on the mall's famous indoor ski slope, says anyone who is overexposed and overleveraged right now may lose their business. "If you are a real estate company that is underfunded, there's a good chance you're going under in the next few months."
That's because many investors were "flipping" property. It was possible and profitable to flip, thanks to skyrocketing property prices and cheap credit. But financial institutions that allowed buyers to put as little as 5 percent down on a property a few months ago have raised that amount to 50 percent. Some institutions have stopped lending altogether.
Banks are also feeling the pain.
"We are experiencing a painful credit squeeze that comes after a five year run of rapidly expanding loan growth from the local banks and ready access to funds from outside," says Simon Williams, HSBC chief economist for Gulf markets. "The local banks are at their limits and external funding is now difficult to secure."
Two of the UAE's largest mortgage companies, Amlak Finance and Tamweel, were nationalized last week, bringing them under the country's ministry of finance, in what was seen as the UAE's first bailout since the crisis began washing over the country.
In response to the crisis, Dubai has established an emergency Financial Advisory Council. One of the goals of the council is to consolidate future projects, which means putting some on hold, and cancelling others altogether.
Then came layoffs. In the past month, billion dollar real estate development companies such as Tameer, Damac, and Omniyat announced they would lay off hundreds of employees, mainly due to "redundancy."
This week's announcement that Nakheel, the developer of the palm island where the Atlantis party was held, would dismiss 15 percent of its workforce only added to the anxiety of Dubai's hundreds of thousands of expatriate workers.
Emirati officials have tried to reassure investors. Mohamed Ali Alabbar, chairman of Emaar Properties and head of the Financial Advisory Council, said last month the real estate sector is "witnessing a healthy correction."
Allen, the author of the real estate survey, echoes this opinion, saying the slowdown will weed out the short-term speculators who drove the market into a bubble. He says the real estate agents he surveyed believe the "market will turn around in 3 to 6 months."
But at the moment, the mood here ranges from gloomy to frantic. "The issue that worries me most is oil. It's the catalyst for so much of what takes place here," HSBC's Mr. Williams says. "If oil prices slump and continue to fall it will feed through into the performance of the real economy, and that will in turn put real pressure on real estate prices."