It is hard to fault the Dubai International Financial Centre (DIFC) for ambition. "It aims to develop the same stature as New York, London and Hong Kong," says its website. On the fifth anniversary of its establishment, the DIFC can reflect with some satisfaction on its progress towards that goal, but must also conclude that it still has some way to go before it can emulate the three most important financial centres in the world.
The reality is that the DIFC has achieved the first stage of its grand plan: it is by common consent the best centre in the Gulf for doing financial business, with the infrastructure, support services and lifestyle amenities that make the City of London and Wall Street such vibrant urban centres. It probably has a head start of between five and 10 years over its regional rivals in this respect. The best gauge of DIFC success is the number of companies that have set up in the centre. Some 800 firms are registered, with 300 of those supervised by the Dubai Financial Services Authority (DFSA), including all of the big names of international finance. That is an impressive achievement in a relatively short time.
It has also exploited the unique advantage of being the only financial centre in the Middle East regulated along independent legal principles according to international best practice, with its watchdog, the DFSA, offering London or New York-style financial regulation. But the challenge, made more pressing after the financial crisis, is to continue to attract firms to set up in the centre, and keep the ones that are there but are faced with tighter finances and rising costs.
Nasser Saidi, the chief economist of the DIFC, said this week that very few of the 300-odd financial member firms had given any indication that they were preparing to pull out of the centre. But there is some evidence that staffing levels are being reduced as the big global players relocate employees back to the revived profit centres of Europe and North America. The crucial test for the DIFC over the next five years is to maintain its impressive record in signing up the world's leading financial institutions, while continuing to make money for Dubai Inc.
In a nutshell, can it continue to persuade the financial "rainmakers" that the benefits of DIFC membership justify the premium rent and other higher regulatory costs they must pay to have a presence there? The answer to this is largely a straightforward property calculation. In Dubai's boom years, when firms wanted to set up within the DIFC, there was more demand than supply of office space within the centre. The DIFC authority allowed firms to lease space outside the physical confines of the centre, but within its regulatory jurisdiction.
Now many of the big developments outside the central Gate area, but still within DIFC oversight, are coming on stream, such as the Liberty House project and the Damac development. Experts believe available space will double between the next 18 months and two years, to about 5 million square feet. But DIFC rents, which are about Dh450 (US$122) per sq ft, are among the highest in the emirate. They compare with figures of about Dh250 per sq ft in nearby Sheikh Zayed Road, or in the spanking new Emaar Square. Can the DIFC attract back those tenants who have migrated to rival areas?
"There is no doubt we have reached a tipping point between supply and demand," says Blair Hagkull, the managing director of Jones Lang LaSalle for the MENA region. "It has already put some downwards pressure on DIFC rents, but now DIFC has to encourage firms to come back within its unique environment." In London this week, Dr Omar bin Suleiman, the Governor of the DIFC, will focus on the global strategic aspects of the centre's challenge. Dr bin Suleiman will update an international audience on the DIFC's progress and explain how its plans have been affected by the financial crisis.
They will hear a subtle change of message about the DIFC's positioning in the region and its long-term plans to become a financial hub for the Gulf and beyond. "It will be less about being the Dubai International Financial Centre than about the International Financial Centre based in Dubai," says one observer. According to this vision, eloquently explained by Dr bin Suleiman's aides, the DIFC will become a financial knowledge hub for the Middle East, North Africa and South Asia.
"The infrastructure is more or less complete," says a DIFC insider. "Now the job is to add the intellectual value to that physical infrastructure. 'Build it and they will come' was a great strategy, but it is not enough any more. You have to show how much they will benefit from coming." The first leg of that new, broader strategy was the visit of a DIFC delegation to Mumbai last month. The DIFC representatives told Indian financiers how they could tap into Gulf liquidity, make use of the DIFC's regulatory advantages and exploit it as a financial conduit between Asia and Europe. By all accounts, it was well received.
The other big question mark over the DIFC is the performance of its very own stock market, NASDAQ Dubai. Just as London could not be a global financial centre without the attraction of the 200-year-old London Stock Exchange, and New York's world domination is based on the NASDAQ and NYSE markets, so Dubai needs a vibrant, indigenous exchange as a focal point for everyday commercial activity. NASDAQ Dubai's record is mixed. It has so far failed to attract big corporates in sufficient numbers to give the exchange unstoppable momentum, and its only big name, DP World, has traded in disappointing volumes and well below the price at which it came to the market in 2007.
On the other hand, there are some encouraging signs that things are picking up at NASDAQ Dubai. Along with the recovery in global financial markets, volumes and prices have shown impressive gains, with the innovative NASDAQ Dubai UAE 20 index 76 per cent up. The exchange has also diversified away from simple equity products into derivatives and options, which has produced some eye-catching results. Equity derivative volumes reached a record of 21,330 last month, compared with just 90 traded in January, says Jeff Singer, the chief executive of NASDAQ Dubai.
The recent $100 million sukuk listed on NASDAQ Dubai by the International Finance Corporation was hailed as a breakthrough for the DIFC's aims to be a global centre for Islamic financial products. But such achievements will not persuade critics, who say the UAE has too many stock markets and the only long-term answer is to merge the three exchanges. The DIFC has come a long way in five short years and has done enough to justify the original ambitious strategy. Its unique position as landlord, regulator and planning authority gives it distinct advantages over its regional rivals, and will continue to do so for the medium term.
But like the rest of Dubai, it must now face up to the new realities of a post-crisis world and adjust its long-term strategy accordingly. @Email:fkane@thenational.ae
