Real estate has always been the surest way to accumulate wealth – and is likely to remain so. Yet, the financial crisis of 2008 changed the game, and brought a healthy dose of reality back to the real estate sector. Today, as investors look at this asset class again with renewed optimism, we need to ask ourselves if we have truly learned the lessons of the past five years.
If you look back over historical data, real estate has provided investors with a stronger and steadier return than any other investment option. It has an uncanny ability to bounce back after a downturn and outperform other asset classes.
The 2008 crisis was a case of the pursuit of profit crowding out sensible investment decision making. True, a few speculators managed to come out unscathed, but most did not. Many lost vast sums of capital when property values plunged by half. Thankfully, it appears we have reached the bottom and are on the way back. But for those investors with memories still fresh from the crisis, is real estate once again an asset class worth considering?
The GCC region is characterized by its rising populations and increasing wealth both contributing to a flourishing economy. Major real estate developers in the UAE reached peak valuations in 2008 before crashing in the crisis due to difficult credit and economic conditions.
Abu Dhabi and Dubai real estate sales showed a significant upward trend from Q4 2011 to Q2 2012. Despite a slowdown during the third quarter, year-on-year activity was still higher, suggesting that Abu Dhabi and Dubai’s real estate market is well on the path to recover.
From a price perspective, the UAE market still offers plenty of opportunities for those looking to invest. On average, the price per square foot is very affordable, and with the absence of property taxes and income tax, the value becomes extremely competitive, especially compared to other major cities around the world.
From a returns perspective, we are unlikely to see pre-2008 growth levels anytime soon. But this is something we should welcome. That’s because we can look forward to greater price stability, thanks to more people investing in completed projects rather than speculating on off-plan developments. Additionally, mortgage reform – and the requirement for larger down payments if implemented by the Central Bank – puts less strain on the financial systems by decreasing the number of defaults, and providing more liquidity. Most significantly, potential new Central Bank regulations, if applied, could eliminate speculators from entering the market and prevent them from falsely “heating up” the market – causing undue price stress, inflated values and an another property bubble.
For investors and home buyers alike, real estate in this country has been a reliable source of wealth generation for many, and yet a great source of heartache for others. Thanks to the confluence of a number of factors, from the introduction of new regulations to the changing of old attitudes, the real estate climate today is very different from the one in pre 2008 crisis.
At ADCM we are very positive about growth in the GCC, and more specifically in the real estate sector in in the UAE. The UAE’s sophisticated regulatory milieu, highly developed financial infrastructure, and a legal system increasingly following rules of global best practices, provides a healthy investing environment for both home buyers and investors alike. In addition to the solid commercial infrastructure, the time is right to capitalise on the underlying value waiting to be unlocked in the UAE real estate sector.
Mustafa Kheriba, Chief Operating Officer, Abu Dhabi Capital Management. Opinion expressed here is his own and do not necessarily reflect that of Gulf News.