Dubai: As British Prime Minister Boris Johnson looks set to make Brexit a reality causing the pound to rally, analysts see clear signs of demand rising in tourism and real estate sectors in the UAE.
The UK currency has been tumbling since the departure of prime minister Theresa May, but is now stabilising after Johnson gets Britain ready to exit the European Union by January 31.
“From the perspective of the UAE, a strengthening in the GBP [pound] against the US dollar and a strengthening confidence will be positive for key service sectors such as tourism. The domestic real estate sector could also see some increase in demand from the UK with a further strengthening in the pound,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
Sterling is currently hovering at 1.34 against the dollar. Since it dropped in August to around 0.93 against the euro, the British currency is now up 11 per cent.
“In the short term, the pound had, for once, well anticipated the outcome of the polls,” said Stéphane Barbier de la Serre, macro strategist at Makor Capital Markets. “Beyond the knee-jerk upwards reaction in the wake of Johnson’s victory, pound is now up in excess of 11 per cent against the euro and most of those gains were secured between September and November.”
In the past years, the pound was rangebound as the hung parliament was unable to agree on the way forward for Brexit, said Vijay Valecha, chief investment officer at Century Financial.
“A large majority for Boris Johnson’s Conservative party removes this uncertainty, but in reality a lot of issues still remain.”
The pound is now back to levels seen when Britain first decided to exit the EU in June 2016, but analysts flag there is a possibility for near-term volatility as the parties are yet to agree on terms of a Brexit deal.
“Trade deals take a lot of time to be finalised and if European Union imposes a lot of conditions, pound/sterling could witness sharp volatility,” Valecha said. “In Scotland, the Scottish National Party (SNP) won 48 out of 59 seats by campaigning for independence and on an intention to remain part of EU — which adds a further layer of uncertainty.”
The gains in pound are likely to be capped in the near term due to these factors, Valecha added.
“The pound offers limited potential at this stage,” Barbier de la Serre added. “In the distance, should macro and political factors be supportive, pound could target the 1.40 area but that remains a fairly daunting target in the short run.”
TRAVEL AND TOURISM
“A strong pound can support more investments into the real estate and can be a good source of tourists for the region,” Valecha said. “The more sterling stays strong, this hands UK holidaymakers on the continent a major foreign exchange advantage.”
Although there will be fluctuations until the final Brexit deal is struck, analysts believe the impact will be short term and the UK will remain a major tourism source market to the UAE in the long term.
A stronger pound on the midterm would increase the purchasing power and make the investment in Middle East and UAE in particular look cheaper than before, analysts said.
“Tourism from UK to UAE will recover through coming year as businesses and confidence would be strengthen in UK and that in turn will reflect in the current stagnated labour market,” said Mohammad Zidan, chief market strategist for ThinkMarkets in Dubai.
But it’s not just the tourism sector where the echoes of a stronger sterling will be heard. The impact of more British tourists will also spill over into the retail sector, for one, as more tourists implies an uptick in shopping and more sales for retailers.
The most predictable is the positive impact of the strengthening British pound on the residential and hospitality sector in Dubai. Citizens of the UK were the emirate’s second largest investment group last year, accounting for about Dh10 billion in investment in the property sector.
Within the UAE, the impact may be stronger for hotels in Dubai compared to those in other emirates as Dubai is one of the primary destinations in the region for British travellers, according to Rashid Aboobacker, associate director at TRI Hospitality Consulting.
The current strong rebound trend of pound sterling is prompting Gulf investors to also buy luxury properties in London before a widely expected price rally.
“The positive expectation about orderly exit from EU would encourage the investors to invest and buy property in UK where they anticipate the fiscal stimulus which will be pursuit by Boris Johnson government would support the economy,” Zidan said.
With the pound now gaining, UK developers’ main marketing theme since June 2016 — that the weak pound is the best thing for foreign buyers from dollar/dollar-pegged markets — is on shaky ground.
While the UAE’s economy may be shielded by consequences from Britain’s exit from the European Union, the sway in the pound may impact the economy near to longer term, with some sectors benefiting and others being put at a disadvantage.
The UAE and other Gulf countries have pegged their currencies to the dollar and a significant amount of revenues in the region derived from oil production, and shocks sparked by extreme pound volatility will be limited.
Analysts have consistently stated how a “strong” UK is always in the best interest of the UAE as the region has strong economic and cultural relationship with the island nation.
“Once Brexit is formalised, UK will be free to strike free trade deals of its own and this could open up the $2.8 trillion economy for GCC products and services,” Valecha said.
The UAE is 11th in a list of the top countries for UK exports, with Saudi Arabia in 14th position. A strong pound will mean goods from the UK will increase and imports will decrease. The GCC is also a major retail destination for UK high street brands and this will make these goods expensive compared to other countries.
AIRLINES AND EDUCATION
The impact on the major regional airlines — Emirates, Etihad and Qatar Airways — will be mixed. Any rise in pound will push higher international travel by UK citizens. Gulf airlines are the major carriers of transit passengers and they will benefit from this scenario.
However, studying at British schools and universities for citizens and expatriates in GCC countries will become less attractive. Tuition fees will increase, making the UK a less-enticing destination for students and their families. This will have a positive impact on the region’s education sector — especially in the UAE, which is currently the sixth largest destination for transnational higher education.
How the pound’s performance will influence decisions by Gulf investors?
The election win does boost sentiment among investors with exposure to the pound and UK equities. Although the pound is recovering, it is still weaker versus a stronger dollar, which in turn leads to a stronger dirham.
“The clear mandate for Prime Minister Boris Johnson and some near-term clarity on Brexit has provided some support for the British pound in end-2019,” Malik said. “However, the next year will still be critical, with a tight time frame to agree a trade agreement with the EU and define a new relationship. Markets will look for greater clarity on this, alongside signs of a pickup in economic activity, for appreciating more fundamentally.”
“Even though the election win was the best outcome for Brexit, markets are still concerned about how smooth the exit will be,” Zidan said. “Although the recovery for sterling is capped by the bad fundamentals from UK economy, I still believe sterling is still have more room to rise against the major currencies.”
Matthew Palm from Alvarez & Marsal: “The Conservative victory is certainly the best outcome for those who already invested in the UK housing market, either as an owner-occupier or a landlord when compared to Labour’s policies. Ultimately, the result provides some certainty, and may encourage sellers and buyers back into the market, while the broader impact of the Conservatives’ economy friendly policies has already been felt in the stock and currency markets.
“However, the UK housing market has been under pressure for several years, which was compounded by stamp duty changes and the Brexit vote in 2016. The UK’s second election in three years is a function of — rather than a panacea for — the latter, and this uncertainty is likely to continue until Brexit is concluded one way or the other — albeit the government now has a clear majority and hence mandate.
“Despite this, overseas buyers continue to benefit from a weak pound, which provides a good entry point into the market with a hedge against Brexit uncertainty. However, with the currency’s recent moves and the Conservative’s intention to introduce a further 3 per cent purchase tax on non-resident purchases, this window of opportunity may be limited. Until then, for those who can both move quickly and take a longer-term view, there remain deals to be had.”
Niccolò Barattieri di San Pietro, chief executive at Northacre, UK’s luxury residential developer:
“The most important aspect of the election result is the resounding win of the conservatives, which takes away a lot of the uncertainty that plagued the property market. Past property market booms in London have also occurred with a strong pound as it signifies low uncertainty and a strong economy.”