Brexit

2019: The year of the brave

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful” Warren Buffet.

2018 was a fearful time for most investors. If not fearful, it was certainly a time of significant concern

We learnt that in 2018, the world is now even much more complex, smaller, more intricate with ever increasing interdependencies between nations, cultures, societies, sciences, industries and economies. With 2018 the advent of globalization, the number of factors that can affect local economies and the industries and markets that operate within those economies has increased dramatically in both number and complexity.

In the face of such global disruption and uncertainty that was experienced in 2018, there is only so much that policy makers in each respective country can achieve. The major global players, once aligned in policy and viewpoint when tackling the global financial crisis, have now disbanded, focusing more on satisfying nationalistic interests at the expense of the global good. This is unfortunate and one only hopes that those with longer term and broader perspectives will eventually prevail.

Dubai, with an economy that has tourism, trade, construction and financial services as primary drivers of economic and population growth, will continue to be affected by global machinations, whether they be political, diplomatic, financial or otherwise. Local industries will be affected by global events. Its inescapable and something that we all, as diligent investors, need to understand.

So, the Real Estate industry in Dubai in 2019 will be shaped by any event or occurrence which affects Dubai’s population growth through its ability to provide opportunities for business and individuals alike; such as the disposable income of its residents and visitors, the affordability of the UAE dirham, the levels of available liquidity to its local and foreign investors, its governments revenues, its relationships with other countries or its commercial infrastructure will have an effect on our industry. It’s a fact that, as professionals within the industry, we all have to contend with.

So, we need to look at those variables that will drive the industry.

Our first consideration is population growth. A growing population is the fuel of any property industry and it will be Dubai’s population growth that enables that bodes well for the market within the next 3 years, particularly as a spike in population growth is expected as the Expo effect takes hold closer to 2020.

It may come as a surprise to some that Dubai’s population has exceeded 3 million by end of 2018. This is up almost 331% since the turn of this century. This amazing growth has been consistent during this period and is expected to continue at a rate of between 6.5% and 9% over the next 10 years. This is fantastic news for Dubai’s property industry and the economy overall especially when other nations are facing stagnating population growth or, in the case of countries like Japan, falling populations.

The composition of the growth is also impressive as it will continue to be predominantly driven by people seeking to immediately benefit from and contribute to an economy that is expected to grow by a healthy and sustained 3.5% in 2019 and beyond, as those who are seeking to progress and improve their economic well-being take advantage of the superior opportunities that Dubai will continue to offer going forward courtesy of such major initiatives as the 2020 Global Expo in addition to the time proven economic pillars of trade, finance and tourism. So, the opportunities are there to capitalize on this population growth and resurgence in demand for property during 2019.
Our second consideration is disposable income of residents and visitors. 2018 saw property values and rents decline significantly. Put simply, these changes make effectively increase, not only the purchasing power of the individual, but also the disposable income that the individual enjoys. First home buyers will not have it so good since 2009. The decline in property values, combined with the slew of developer purchasing plans, have created value propositions that will not be repeated for quite some time.

And, as our friend My Warren Buffet is so fond of saying, “Price is what you pay. Value is what you get”, and values in 2019 are unlikely to be bettered any time soon.

Our third consideration is the affordability of the UAE Dirham. There is no doubt that the strengthening UAE Dirham has contributed to the dampening of foreign buyers. Being coupled to a US dollar, being strengthened on the back of interest rate increases in the United States, has caused some to pause.

However, the US Federal Reserve is increasingly likely to slow its interest rate increase agenda. The recent concern in world markets about the effect that an overly hawkish US monetary policy might have on US and global economic growth is causing the Fed to exhibit a more dovish tone when talking about interest rates increases in 2019.

In addition, the recent fall in oil prices, while reducing the revenues of oil producing nations, has had a positive effect in helping the Indian rupee to stabilize, essentially stopping its freefall in value. By October of 2018, the Indian rupee had fallen to an historic low, taking over 20 Indian rupees to buy 1 UAE Dirham. Investing in Dubai suddenly became expensive for one of the UAE’s most important investor groups. In addition, repatriating Dubai’s currency back home was becoming a far better proposition than spending in Dubai.
But already, the rupee has strengthened by over 5 percent and is expected to continue strengthening through 2019, thereby increasing the attractiveness of investing in Dubai.

Similarly, the Chinese economy, markets and its currency, the yuan, have been in decline since the US inspired trade issues emerged. China is becoming an important source of investment for the UAE economy and the possibility of a full-blown trade war between China and the United States would, in addition to adversely affecting oil prices, may slow the rate of Chinese investment in the UAE.

However, as at the time of writing, it appeared that tensions may be easing and the beginning of productive and positive negotiations are foreseeable. Needless to say, a resolution would be significantly beneficial to world economic growth, investor confidence and renewed investor activity.

The real remaining concern is Brexit. This continuing saga appears to be headed for an outcome which, in the short term at least, will see a further weakening of the British pound, thereby making investment in Dubai a more expensive proposition for the British. The jury is still out on the timing of recovery of the British pound.

Meanwhile, the UAE banking sector is liquid and strong, with the central bank forecasting credit growth to the private sector to increase by 6.5 per cent in the first nine months of 2019. In addition, Islamic banking is growing at a rate of 9 per cent annually leading the Governor of the UAE Central Bank to state that “… the banking sector is in a very good position to excel and support economic growth” and that the banking sector is not being impacted by the correction in real estate values with banks continuing to provide credit to the industry. “The property market is in a good position, more than before, and lending continues,” the governor said.

Dubai’s infrastructural spending continues with a total budget of Dh56.8 billion being announced for 2019. Heavily focused on infrastructure projects led by Expo 2020 the budget comes in line with Dubai Strategic Plan 2021’s targets and future commitments. The budget features a rise in infrastructure spending, which makes up 21 per cent of the total government expenditure. This reflects the directives of Sheikh Mohammed to raise infrastructure efficiency in Dubai for the emirate to become the preferred destination for living, tourism, and businesses across all sectors.
And finally, notwithstanding some inflationary effect on consumer prices, the concerns that were being opined about any significantly negative effect of the newly introduced VAT do not appear to have materialized. The UAE implemented VAT at the rate of five percent in January 2018. VAT is not a new phenomenon. It has been implemented in many economies around the world and is considered an efficient and equitable way for governments to collect tax revenue to invest, innovate, develop infrastructure and provide services that are required for sustainable economic growth. The IMF has predicted that the UAE may improve GDP by as much as 1.5% by implementing a 5% VAT. Some countries have applied 20% VAT’s to generate the revenues required by their governments without detriment to their property Industries. Yet. Some investors were concerned and, as has been shown in other economies that have introduced VAT, those concerns eventually proved baseless with time.

So, the picture is not as bleak as some may surmise. Quite the contrary. Taking a broader perspective and looking at all the major influences individually and logically, the picture suggests beckoning opportunities, particularly when taking a medium to long-term view.
There is no doubt that the market is nervous, but I believe that 2019 will be viewed as the year of the brave investors as they take advantage of a market that has achieved almost full correction, that is offering fantastic value and that will benefit from an economy that looks primed for sustainable long-term growth.

Complex, it may be, but unfathomable it is not.

Mohanad Alwadiya – Jan 2019

The YEAR 2016 WAS NOT JUST ABOUT OIL

By Mohanad Alwadiya
CEO, Harbor Real Estate
Senior Advisor & Instructor, Dubai Real Estate Institute

I believe that the malaise that was felt in Dubai’s real estate industry was due to a wide variety of factors, not just the price of oil and that considering oil prices alone is simply too one dimensional. The factors that have affected the Dubai property industry in 2016 are many, varied and, in some instances, quite complex.

Many investors had high expectations for 2016 but not many really expected 2016 to announce its arrival with such mayhem and drama. In short, most investors started the year peering into a fog of uncertainty with only continual negative headlines to guide their reasoning.

The issues in 2016 were as varied as they were significant. Everything from a U.S. presidential race that has the world bemused (and perhaps frightened as to its outcome) to doubts regarding the capability of China to effectively manage and steer its economy away from being export driven to relying on local consumption and the development of its middle class to a massive refugee crisis will continue as long as there is violence in the Middle East which, of course, shows little sign of abating.

Then there was the continuing saga of U.S. Federal Reserve’s shift from the near-zero interest rates that continued to spook investors to the extent that all rational and fundamental analysis enabling investment decisions seems to have been replaced by an intense and sometimes amusing focus on the vocabulary and grammar used in Fed statements in an effort find some hidden indication of its intent. Thankfully the Fed raised interest rates on December 14, putting to rest all the unnecessary speculation and pointless chatter that was crowding the airwaves.

Meanwhile, the ongoing collapse of oil and commodity prices had threatened to trigger recessions in emerging economies like Russia and Brazil all at the time that Europe continues to struggle for growth. Thankfully, OPEC and a few other oil producing nations such as Russia finally came to some agreement to cap supply after realising that unbridled production in pursuit of long term market share was beginning to destroy some economies.

Then of course, there was Brexit, the effects of which will be as diverse as they will be complex… if only they can figure out how to do it! Experts are still unsure as to how the decision made by the majority of Brits will affect everything from the European geo-political and socio-economic landscape, the strength and resilience of the European Union in the face of further discontent within its member states, the social and economic ramifications to a newly “independent” United Kingdom and the inevitable question as to whether the United Kingdom can remain united given the Scottish and Northern Island wishes to continue as part of the EU. The pound has plummeted and is likely to remain subdued for some time.

Not surprisingly, the IMF trimmed its global growth outlook for 2016 to 3.1 percent, down from 3.6 percent, however it is forecasting 3.4 percent for 2017.

So, what could an investor do in 2017? … mired in the depths of despair and confusion at the deluge of negative headlines, Trump tweets and seemingly shallow financial advice and at the direction of global economies and financial markets, and feeling clueless as to where the opportunities for returns on his hard-earned capital might be?

Well, investing in Dubai Real Estate has still provided significant potential to satisfy the appetite for investment returns and the fundamental reasons are compelling.

As detailed above, an economy growing on the back of strategic commercial and infrastructural initiatives unique to the region driving population growth of 7% annually makes investing very interesting, particularly when taking the medium to long term view.

Tourism and Trade are flourishing in Dubai and the focus of spending has been on new projects to grow these important revenue generating economic segments and further diversification. The launch of 2 major theme parks in 2016 will ensure Dubai attracts over 15 million visitors in 2017, continuing a growth trend of approximately 10% per annum since 2010 and is well on track to attracting over 20 million visitors in 2020.

Then, continual diversification of the economy provides reduced risk and is the language of economic planners now, not oil, and any risk is well compensated for by superior returns with rental yields in Dubai being among the highest in the world with the added advantage of favourable tax conditions for most investors.

The confluence of global shifts and market demand

By Mohanad Alwadiya
CEO, Harbor Real Estate
Senior Advisor & Instructor, Dubai Real Estate Institute
Published: Expert Eye, Freehold, Gulf News

The phenomenon of globalization has been around for a while, and all economies, regardless of scale and location, are subject to forces that continue to shape and reshape them.

Real estate markets globally are feeling the effects of a general decline in global economic growth. The world is still, after some eight years, trying to shake off the effects of the global financial crisis and while some economies such as the US have fared reasonably, other major economies in Europe and Asia are still struggling with systemic issues.

In addition, the ongoing issues associated with geo-political upheavals, politically inspired sanctions and major restructurings such as Brexit, simply add to the overall pall of gloom that seems to hang over virtually every headline that we read these days.

The resulting effect on consumer and investor confidence is quite negative, and we all know that confidence is a key prerequisite for growth in the industry. World events are definitely affecting, not just Dubai, but global sentiment overall.

Yet the market is still developing… it is not stagnant. It is always a very promising sign when an industry demonstrates the flexibility and resilience to undertake a structural shift when market requirements change or develop. This is exactly what we are witnessing in the Dubai real estate industry.

It came as no surprise to those that take a broader view of the industry that calls from a variety of industry participants including the government, banks and the more visionary industry observers for more affordable housing in Dubai gathered volume and intensity. In so doing, there was a recognition that the most important investor in Dubai’s real estate market had been forgotten all too often by developers and brokers, and that a refocusing on building affordable, robust and sustainable communities to be inhabited by the average family living frugally on an average salary was of irrefutable importance if Dubai’s economy was to develop and grow to the next level.

So the news that total value of real estate transactions in Dubai at AED 113 billion in the first half of 2016 represented a decline of around 12 percent from the first six months of 2015 may have disappointed some, but did not tell the whole story. The fact that this total figure was generated by 28,251 transactions, almost 25 percent higher than the same period last year, is very good news indeed. It clearly demonstrates a market that in growing in health, because it can provide more affordable solutions to a broader spectrum of owner occupiers and investors.

Just about everybody who plays a role in our industry has a role in providing affordable housing but, more significantly, the government, the financiers and the developers. And given the results of the first half of 2016, they are to be congratulated for initiating the structural shifts that we are witnessing.

As proven in the recently concluded Cityscape Global 2016 event held at the Dubai World Trade Centre early this month, the level of interest in Dubai real estate projects and in the UAE as a whole, as well as in world-class developments being marketed overseas, remains high.

However, a lot of work still needs to be done for the demand for more affordable housing to be fully satisfied. If the emirate is able to realistically supplement the clamor for affordable housing, perhaps even those renting in nearby emirates would be persuaded to make Dubai their permanent home.

Brexit & Dubai realty

The effects of “Brexit” are as diverse as they are far-reaching, with experts considering how the decision made by the majority of Brits will affect everything – from the European geopolitical and socio-economic landscape, the strength and resilience of the European Union in the face of further discontent among its member states, the social and economic ramifications to a newly “independent” United Kingdom, and the inevitable question as to whether the United Kingdom can remain united given the Scottish and Northern Islands’ wish to continue as part of the European Union.

In addition, the whole strategic alliance framework of the West has been weakened somewhat as a robust and strongly united European Union was always considered to be a cornerstone to an effective defense to an aggressive Russia and China on both economic and security fronts.

All this is heady stuff, complicated by the fact that the separation process will be negotiated by a new English Prime Minister, and will probably take up to 2 years! Understandably, the whole world is worried because all the financial and trade mechanisms, agreements, communication channels, policies, protocols and security arrangements that have taken over four decades to build will soon be set to zero for renegotiation.

No wonder the world is nervous and understandably uncertain as to what the future might hold.

And it’s that uncertainty which will have an effect on the Dubai property scene. As we all know, investors and potential homeowners alike do not handle uncertainty well.

And it is this very same uncertainty that now lies around the effect of the Brexit on world growth, and the possibility of European and UK recessions in the coming year that will make most investors move to less risky assets and safe haven currencies such as the Japanese yen and the US dollar.

Of course, uncertainty regarding world growth has also negatively affected oil prices so many investors will be more reticent to invest in those economies that rely on its revenue. While we all know that Dubai is much less reliant on oil than the neighboring UAE emirates and Middle Eastern countries, it will still be affected by investor nervousness by way of association, which is unfortunate yet a reality. Just take a look at the Dubai Financial Market – it lost 3.3 percent, the biggest decline since January, as Emaar Properties PJSC fell by 4.7 percent, mirroring the Brexit effect on many other markets around the world. Hardly rational, in my view.

And investors will be looking closely at the effect of Brexit on the Dubai tourism industry as well. In the first quarter of 2016, Western Europe was the second largest source of tourists to Dubai by region, accounting for 23 per cent, led by the UK’s 8 per cent and Germany’s 3 per cent.

With the Euro weakened to $1.10, and with most analysts bearish on its immediate future, it is hard to imagine that level of contribution will continue until the post-Brexit uncertainty dissipates. Now, such a strong pillar in Dubai’s burgeoning economy, tourism rates can be affected as nearly every global currency has depreciated versus the AED, making travel to the UAE more expensive for the majority of global travelers while journeying to the UK and Europe for most people has just got a lot cheaper. Hopefully, many will still use Dubai as a travel hub and take advantage of what this exciting city has to offer during stopovers.

At the time of writing, the British pound had fallen more than 10 per cent to below $1.34 and is still falling as uncertainty continues to cloud everybody’s view as to the future of the UK economy. This is significant as British investors alone injected £1.9bn into Dubai’s property sector in 2015, purchasing around AED 10 billion worth of UAE property assets and ranking them second with an overall 7 per cent of total investments made in the sector in 2015, increasing from the prior year. Needless to say, with such a currency devaluation and an uncertain outlook, Dubai property has suddenly become a lot more expensive for those wishing to purchase with British pounds.

And yet, the London property market has just become a lot more affordable. Already, there are reports of overseas buyers from all over the world taking advantage of the weaker pound to buy property in the stunned city. While a feeding frenzy hasn’t developed as yet, a prolonged weakness in the pound could divert significant levels of investment capital away from markets such as Dubai, especially as British expats, living in the emirate and earning UAE dirhams, take advantage of exchange rate gains to invest back home.

So, while there are interesting times ahead, there is no need to act impulsively or with any undue haste. The true extent and nature of the ramifications of the Brexit decision are yet to be fully identified, analyzed and quantified. It is still early days, and it will take some time for the fog of uncertainty to clear and for opportunities to emerge. Decision time will come soon enough.