Expert-Eye-11Nov17

3 factors that will influence Dubai reality

Cityscape is finished for this year and the headline results are impressive: A record turnout that showed a year on year increase of 25%; over 300 exhibitors requiring 2 extra exhibition halls; a new initiative to allow sales transactions to be completed onsite resulting in a 186 per cent increase in off-plan property transactions being registered with the Dubai Land Department during the period and the reveal of plans for the Expo 2020 site gave this year’s Cityscape some real gravitas.

I walked away from the exhibition with a feeling that Dubai’s property industry has just commenced one of the most important 3 years of its relatively young life since the post Global Financial recession and that this period will have clearly defined bookends, with the recently completed Cityscape at one end and the Dubai Global Expo 2020 at the opposite end.

So, what do we have to look forward to over the next 3 years? The obvious answer is the Dubai 2020 World Expo. The market has been waiting patiently for the positive effects that the Expo generated population growth will bring to the market to eventuate.

But there are other real and pervasive influences that we need to consider and observe, for they will have a significant effect on what happens in our industry leading up to the much anticipated 2020 event.

The first challenge is VAT which has fast become the most popular acronym in the industry today. 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. As oil prices have declined significantly, oil dependent economies require new sources of revenue to continue to invest, innovate, develop infrastructure and provide services that are required for sustainable economic growth. The IMF has predicted that the USE 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.

But VAT will have an inflationary effect on the economy as most items required for everyday life will be taxed. Salaries and wage increases will likely lag the introduction of the tax which may impact disposable income levels and affect the ability to save for a house deposit.

As a purchaser of a new home, your purchase is exempt from VAT, but the price will certainly be adjusted to cover the VAT that has already been paid on the value for materials, labor, marketing and other services etc. that the developer had to incur to bring the project to market, while, sellers in the secondary market will be exempt from VAT, yet still need to pay VAT on any Real Estate Agents fees, marketing fees, and maintenance or staging fees.

The sale of Commercial properties, however, will attract the VAT, adding to the cost burden of setting up or operating a business. Once again, consumers will eventually be affected.

The second challenge will be a strengthening US dollar. In an industry where at least 40% of purchases are made by investors that hail from countries whose currencies float freely, the postponed yet inevitable interest rate hikes by the US Federal Reserve, the effectiveness of US fiscal policy and the diplomatic, trade and geo-political effects of increasingly nationalistic policies are likely to present challenges in terms of relative value and affordability as property in other markets such as the UK, Asia or Europe become more attractive. This will be compounded somewhat as the on-going saga of the Brexit implementation is likely to carry on for some time, probably leading to a continuance of a weak British pound for the foreseeable future.

A strong US dollar will also impact one of Dubai’s fundamental and burgeoning economic pillars, tourism. A strengthening AED, combined with the application of the VAT, makes visiting the Emirate a more expensive proposition, particularly if currencies of other countries competing for the tourist dollar are weakening.

Finally, there is no denying that oil prices are very important. While the Dubai economy is only minimally reliant on oil for its GDP, the price of oil does have a strong effect on the levels of liquidity available for the property market and greatly influences the confidence levels of overseas investors in the region.

Somewhat conversely, there are those that believe, for variety of reasons, that the historical inverse relationship of oil prices and USD strength has changed. If so, we may be entering a sustained period whereby oil prices rise in sync with the USD. A positive correlation would certainly help offset increasing USD strength, however, it would make a return to a weak USD and strong oil price scenario increasingly unlikely.

We live in very interesting times.

 

 

 

Affordability matters most

This year’s Cityscape Global Exhibition and Conference is forecast to be the largest yet and comes at a time when Dubai’s Real Estate industry is expected to start entering a cyclical growth phase in the lead up to the World Expo 2020.

The importance of Cityscape Global cannot be overstated. As with many exhibitions, it provides a concentrated and focused forum which allows the industry to showcase its vision and capabilities and demonstrate what shape Dubai will take in the future. But Cityscape is much more than that.

Cityscape Global is an open invitation for all stake-holders to understand, evaluate, participate and prosper in an industry that continues to literally change the shape of Dubai. It is a meeting place of some of the biggest and brightest minds representing all stakeholders in the industry and a confluence of opinions, ideas and opportunities which are shared, debated and developed. It allows stakeholders to gain a macro sense of in-dusty direction and a micro understanding of the various elements that will shape the industry going forward.

For buyers and investors, there is no better place to gain an appreciation of the myriad of opportunities that are on offer, but the sheer scale of the exhibition can become a little overwhelming, especially when you are looking to invest.

As a general theme for this year’s Cityscape, I will be advising most of my investors to look for value opportunities in the affordable housing segment, particularly in the Dubai South areas, as this segment in this location is likely to be the subject of some very attractive easy payment plans to further enhance affordability and, to some extent, mitigate risk.

This segment has outperformed its more luxurious alternatives for some time now and continues to show lots of potential, even though the recent cyclical correction. Affordable properties will continue to be on high demand as Dubai’s population growth gains momentum during a period of expected strong economic growth leading up to the end of the decade. And while the value is irrefutable, the risks associated with investing in the affordable segments of the industry as opposed to the luxury segments are much lower. Demand for affordable accommodation will continue to grow as Dubai’s population swells in the run up to the Expo. As Dubai continues to grow, so does the need for affordable housing.

Yet, although I see great value in investing in the affordable segment, it doesn’t mean some interesting opportunities won’t appear in other segments as well.

So, while you might focus on identifying opportunities in the affordable segment, you need to keep an open mind and be wary of unique opportunities that may be present.

I always advise my clients that the best way to get the most out of the event, is to canvass all the interesting opportunities on display and gradually yet efficiently establish a short list of the best opportunities.

Establishing such a list from an exhibition as huge as Cityscape is not easy and requires a disciplined approach. This is where a property asset management professional can assist…

Why? It’s important to understand what factors are going determine the potential of any investment. For property, these factors include everything from macro level influences such as global economic performance and policies, geopolitical issues, currency rates and oil prices to more regional or local factors such as industry supply I demand levels, consumer confidence, government policy and regulatory framework, industry cycles and liquidity in the marketplace.

So, in reality, a lot of the work in ensuring that investors and potential buyers make the most of their Cityscape experience is actually done beforehand in preparing an understanding of what the overall investment environment looks like. This enables a more efficient and focused assessment of all that is on offer.

But in addition to understanding the invest environment, it’s important for the investor to understand why he or she wants to invest in property and what the investment objectives are. Too many investors formulate the answers to these questions “on the run”, once they are traipsing around the exhibition. This lack of preparation just leads to confusion and ultimately, poor decision making.

Every industry has its shows, whether it’s the myriad of motor shows held around the world, film festivals, fashion events, airshows and the property industry is no different. What many don’t understand is that Dubai’s Cityscape Global has established itself as one of the best Real Estate and Property events globally… and its right on our very own doorstep!

So, for those of us with a passion for the industry, it is going to be an exciting 3 days. It always seems to end too early!