What Dubai's newer property investors must keep in mind

On one summer morning in June 2002, in the already legendary city of Dubai came the announcement that expatriates were allowed to buy real estate on a freehold basis.

Prior to that, there had been moves made in the asset markets towards liberalization, but on this particular morning, there was a launch: 3-bedroom Meadows villas were being sold at Dh1.2 million. And 2-bedroom Spring townhouses (Type 4M and 4E for those who were there at that time) were going for Dh400,000.

More than 20 years later, the prices (depending on the level of refurbishment) have risen by more than 6x on a conservative basis (not counting for the rents that had accrued in the meantime).

The lesson that can be drawn from those two data points is that when it comes to long-term investing, it doesn’t matter what happens on a random Thursday. Yet, commentators are obsessed about it. Fair enough.

In the same cycle, 2-bedroom Springs Townhouses peaked at nearly Dh3 million in 2007, and 3-bedroom Meadows villas touched a high of Dh7 million. The same can be said about villas in Emirates Hills, which transacted at more than Dh60 million (or higher than Dh4,000 psf) within 6 years.

At those entry points, the returns have been modest. Fast forward to the Covid pandemic and the price points for the said townhouses was Dh900,000 and Dh2.4 million for the 3-bed villa.

It is clear that entry points matter. And when we talk about markets and long-term investing, every exit from the market must be backed by a plan to get back into the markets. Especially when there is extreme turmoil.

Not to do so, would be to give up on some of the outsized gains that accrue when such turmoil does occur. This is easier in the capital markets where there are fewer transaction and ‘friction’ costs than in real estate.

In all cases, there is a sense that at some point ‘buy the dip’ kicks in. In the current rally, with the advances in AI, what seems to have happened is that the tendency to buy when the market dips is so overpowering that any correction has been swiftly followed by a ferocious rally, regardless of the underlying valuations.

Given the assumption that we are on an exponential growth curve, it does not matter what point we are on the curve, there is going to be rapid growth - and so the entry point of an investment does not matter.

This presumes that something about the nature of investing and markets has changed, when we know that at every previous point of a market high, there has been the same sort of commentary associated with such price moves only for there to be a subsequent decade or more of ‘lost returns’ that have followed.

To not understand the same is to be seduced by a form of magic, a game of intricate enchantment and deception that investors need to be wary of.

It is easy to forget that these gains occurred against a backdrop of an extended period of nearly zero interest rates and now that they have started to normalize, the equity risk premium is hovering at zero. (Implying there is no difference between holding risk-free assets and equity assets).

It is also easy to forget that assets will trade at higher valuations for prolonged periods of times, during such periods of ebullience. To give in to these impulses is not to give up on gains that others are enjoying - although that may be the case from time to time.

A better mental model is to exercise some sort of information hygiene and discipline, one where volatility is a friend and not a foe. Many a time has this phenomena occurred, regardless of technological innovation, in this hamster wheel of investment cycles.

It is surely coming again.