2017 UAE Real Estate Trends: Cautious Optimism

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In a market that has encountered considerable headwinds in recent years, it’s understandable that few agents anticipate prices will increase in the second quarter of 2017 – just 8% predict residential villa prices will rise and only 11% expect apartments to make gains. Although these forecasts are explicitly for the current quarter, it’s likely that 12-month predictions would paint a similar picture.

From a front row seat, I have watched the residential property market erode value for the past 3 years. I have read the reports, listened to clients, and importantly, paid close attention to our own transaction data. A variety of factors laid the foundations and exacerbated the market decline. These are now well documented, ranging from the strong US dollar and rising interest rates, to the increase in new housing supply, not to mention the negative impact that a low oil price can have on market sentiment. It should also not go unnoticed that the market decline occurred after a three year cycle of exceptional growth. That growth rate was clearly unsustainable and hindsight can now tell us that a cyclical downturn and change in sentiment was inevitable.

After the last three years of decline, it is tempting to stick with the crowd and focus on the negatives. Particularly since those risk factors are still clear for all to see. It is undeniable that continued US dollar strength, rising interest rates, together with a significant pipeline of housing supply and geopolitical tension in the region, all impact on the fragile state of confidence in Dubai’s property market.

However, a combination of “big picture thinking” and positive market fundamentals encourages us to believe that modest price growth might now be on the horizon in prime residential communities. The “big picture thinking” is rather subjective, yet insightful nonetheless. It is a general principle that guides one basic assumption which is as follows: the longer we are in the correction phase of the cycle, the closer we must be to the start of the new upwards trending cycle. This might seem like an obvious statement but it is one that is often overlooked by the crowd.

In the latter stages of the cycle, it usually pays off to have a contrarian view. With only 8% of agents predicting price growth, it is starting to feel like the crowd is overly focused on the negatives. With regards to positive fundamentals, there are the obviously positive GDP statistics; population growth and the general hype surrounding Expo2020.

However, what’s really interesting is something that does not attract much attention. That is, the extent to which the “weight of money” can act as a stimulant to the residential property market. I have been looking for evidence to support my opinion that there is a significant amount of cash sitting on the sidelines. It is my belief that this “weight of money” is now acting as a stimulant to the market. This is a trend that is expected to continue to unfold in the months ahead.

In recent years, I have watched previously active investors remain stubbornly inactive, and listened to many end-users who take the decision to rent (or continue to rent) rather than buy. The reason for this has been simple. Who wants to buy into a market that is in the midst of a double digit decline? It has also been the case that yields were low which reduced the incentive for investors, and removed the financial benefit of owning your own home.

I remember crunching the numbers for the apartment I was renting in 2014. I realised I would only generate a net return of circa 4% on my equity, if I chose to buy the property rather than rent it. This was not a sufficient incentive for me at that time.

If I am to run the same calculation today, my previous apartment would now deliver me circa 8% net return on my equity. It is now clearly more appealing to buy. The higher yield also provides a cushion against any continued rental price declines. Interestingly, in the popular Springs community, it is now possible to achieve net yields of up to 6.5% and net returns on equity of circa 10% for nance buyers using 75% LTV mortgage products.

This provides great financial incentive to buy rather than rent, which is a very different picture to that of 2014. In 2017, I have witnessed several clients, both end-users and investors, choosing to buy, despite the fact that they continue to have legitimate concerns about the market. This is the “weight of money” in action. One client told me, “I don’t really like the market but I have to do something with my cash”. He understands that as a cash investor there is an opportunity cost of around 6 per cent per annum when holding liquid cash rather than property.

Effectively, the market would have to decline by more than 6% every year for it to reward him for the decision to hold a liquid cash deposit over a residential property investment.

To support my view on the “weight of money”, I have looked closely at the Money Supply Data from the UAE Central Bank. I compared the different measures of Money Supply in February 2017 to that of the previous month of January 2017 and also to that of December 2013, when the residential market was reaching its peak and found the following:

  • M1* Money Supply for February 2017 is 1.89% above January 2017 and 28% above December 2013
  • M2** Money Supply for February 2017 is 1.14% above January 2017 and 19% above December 2013
  • M1 Monetary Deposits for February 2017 is 2.1% above January 2017 and 28.9% above December 2013.

The increase in Money Supply is due to a combination of factors, ranging from an increase in population and new account openings, as well as continued wealth creation that is still held in liquid assets within the UAE. This brings me to my conclusion and to the final component of my cautiously optimistic outlook for the residential market. It is the environment in which I immerse myself every day, the front line of the residential real estate market. I attend three morning sales meetings every week. I see every offer, every new listing, and track our buyer enquiry volumes on a weekly basis. I know of every property that we sell and I speak regularly to each of our brokers to better understand the opinions and motivations of their clients.

All of this acts as a general barometer which gives me a clear understanding of the market, and helps to shape my opinions and confidence levels. The first quarter of 2017 has been Espace’s best on record. When I analyse our year-on-year performance for the first quarter I see the following:

  • Revenue growth of 21%
  • 35% more sales transactions
  • 58% more leasing transactions

Increase in cash buyers, with 38% of our 2017 first quarter transactions being in cash, compared to 30% for 2016 in the same quarter.

Although I am certainly not blind to the risks of buying a property in Dubai, I am more optimistic than I have been at any time during the last 3 years. I also think that the inflationary risks of not buying should not be overlooked, particularly for anyone with a longer term strategy in mind.

John Lyons
Head of Sales & Leasing, Espace Real Estate
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