Keep your powder dry or buy Dubai real estate?

As the Dubai market seems to have stabilised over the past few months, many potential homeowners sitting on the sidelines believe now is the time to buy a house – the market seems to have bottomed and banks are active again with attractive mortgage rates.

But, when all seemed to be going well for the real estate sector, a global economic crisis seems to be looming again.

Analysts seem to be divided on the kind of impact this will have on the Gulf.

In such a scenario, is it wise to invest in the local real estate market or keep one’s powder dry?

Steen Jakobsen, Chief Economist at Saxo Bank believes cash will continue to rule in the coming months.

“It's a valid strategy to await the resolution to the world debt crisis and for now cash is king,” he told 'Emirates24|7'.

According to Jakobsen, “We see the coming quarter as one of 'maximum intervention' where the policy of extend-and-pretend continues from policy makers. We have seen Switzerland and Japan initiate a QE (quantitative easing) extreme based on their need to inflation - in our opinion ECB and the FED will follow suit. The consensus on US growth a bit too negative in our opinion while the European is too optimistic - leaving a volatile market,” he explained.

Commenting on whether investments in realty make a wise choice now, he said: “In terms of real estate - there is good fundamental reasons for thinking brick and mortars will outperform other assets, but as with any investment the relative starting point is of essence. Here, your local market is getting cheap, but not cheap enough for me as a long-term investor, and, furthermore, I am slightly concerned about the competition from Qatar, which recently began offering permanent residency. So, all in all, yes, keep the powder dry. Yes, real estate can perform, and, finally, your market still seems slightly overpriced relative to demograhics and relative price.”

According to Giyas Gokkent, Group Chief Economist at National Bank of Abu Dhabi (NBAD), “Increased uncertainty affects expenditure decisions negatively.
“The negative wealth effect from declining stock market indices creates a negative wealth effect also discouraging expenditures. More property supply may further weigh on prices, thus encouraging buyers to defer purchases.

“However, banks are now offering very competitive mortgages and property valuations have become more attractive. Advertised sales price data we track indicate that prices have been relatively stable in the last few months. In fact, anecdotal evidence suggests that Dubai property sector was a beneficiary of the MENA turmoil as Dubai cemented its position as a regional hub,” he said.

However, the NBAD expert believes that if the US and the Eurozone economy deteriorate further, it will have a negative impact on real estate.

“The impact would be negative working through a number of channels. For instance, credit for home purchases may become more scarce and expensive. In the past, increased risk aversion has also meant a strengthening dollar. Given the fixed exchange rate regime, that would mean property here would become more expensive to buyers from non-dollar economies.

“A decline in global stock markets would create contagion to local markets as well and accentuate negative wealth effects. Moreover, from a macro perspective, a global double dip would probably be accompanied by a decline in oil prices and affect the broader economy in the region. This could have a negative impact in expenditure decisions. Households would fear for employment prospects and defer large purchases,” he told this website.

MR Raghu, Senior Vice-President-Research at Kuwait Financial Centre (Markaz) doesn’t think real estate needs any new negative triggers!

“The US real estate is struggling to get up while Eurozone problems are only deepening further. A marked deterioration in the Western economic growth will make real estate even more attractive with ultra-low interest rates. This may have negative implications as it depends to a great extent on foreigners to stimulate demand. Foreigners may not have a valid reason to shun their home markets in favour of Dubai. The risk premium for real estate has gone up significantly post the real estate crisis and has got further dented with the financial crisis. Hence, it may take longer than expected for demand to come back,” he added.

However, there are some experts in the market, who believe that Dubai real estate market is showing signs of improvement and this should continue.

Commenting on the impact of the economic problems on the West and its likely impact on Dubai real estate, Tom Bunker, Investment Sales Consultant, Head Office, Better Homes said: “There will be a mixed reaction with investors regarding the threat of a double dip recession in the West. Some will hold onto their cash while others will continue investing. Those that are still investing are being far more cautious now though. This threat of a future recession has been in the market for some time now, so it is not news to most investors.

“We are starting to see more and more investors from the US and the EU and this is largely due to the dismal state of affairs in these two economies. In some cases people want to spread their investments around and are looking at Dubai now.

“In other cases, people are looking to get out of their current currencies (USD and Euro) and investing in property makes sense right now. In some cases, where these investors' currency is strong (Swiss Franc) property prices in Dubai are quite attractive and this is contributing to our strengthening property market. Investors are also quite wary of banks these days.  

“They are not sure who they can trust and the strong banks are offering little on deposits. The interest rates the banks are offering right now are very low and their service fees are very high, but property in Dubai can still achieve 4-5 per cent yields. So many are looking to place their money in stronger investments especially property where they can let the investment sit for a few years before cashing out,” he added.

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