“Facts and truth really don’t have much to do with each other” ... William Faulkner
Inflection points in asset markets are always identified after the fact. It has been extremely rare in history where these events have been forecast with accuracy on a systematic basis.
In Dubai, it is now accepted that equity markets reached their lows in February 2016, having since rebounded by more than 40 per cent. A similar experience was witnessed in oil prices as well, with forecasts for both corporate earnings and GDP growth turning increasingly optimistic in recent months.
In real estate, prices have flatlined for the last few months, with green shoots witnessed in certain areas, whereas sluggishness continues to prevail in others. While pundits continue to debate on the outlook for the sector, it is worth bearing in mind the following truths as investors make asset allocation decisions.
Despite concerns about Central Bank curbs imposed in 2014, mortgage activity has continued to rise steadily across communities in Dubai, both in the residential as well as in the commercial space as the home financing trends normalise towards global standards. In point of fact, not only has the incidence of mortgages increased, the rate of increase has been on a steady incline, both in the ready as in the off-plan space.
With access to finance being more readily available (especially as banks seek to recalibrate towards asset-based financing), homeowners as well as investors have taken advantage of market conditions towards asset building, a trend likely to accelerate.
Budgetary spending on infrastructure continues to increase at a double-digit rate in the run up to the seminal Expo 2020 event. Historically speaking, there has always been a positive correlation between the amount of infrastructure spending increase and the resultant impact not only on the job market, but also on real estate and asset prices in general.
Equity markets have already started to factor in this optimism, a trend expected to continue in the coming years. While there has been angst expressed as to the levels of well-advertised job losses, there remains job creation in virtually every sector, as evidenced by data at the Dubai Statistics Center.
While both the pace of job creation and the rate of salary increments have slowed, there is little doubt that both population as well as job creation remain positive, despite the headwinds witnessed in the form of exogenous economic shocks (oil prices, Brexit, etc).
Despite concerns about a secular strong US dollar, there has been little long term evidence that suggests a major impact on asset prices. Undoubtedly, there is some impact on money flows and these have been felt across the board. However, in the long term, money flows broadly follow fundamentals.
In Dubai, there has been evidence of increased money flows (facilitated by bank financing) in mid-income communities (a sector that has long remained under supplied), and capital formation, both at the asset level, as well at the company formation level, shows resilience and, in cases, even robustness. Analyst forecasts and interpretations are typically met with scepticism (especially when the forecasts are considered optimistic) because it is widely accepted that these are agenda-based, either to talk up the market, or to capitalise on opportunistic situations. In the long term, what is evident is that these tactics do not work.
In the age of Big Data, what ultimately prevails are fundamentals that are created by organic conditions. These conditions are dominated by domestic fiscal policy.
The UAE has been at the forefront of increasing budgetary spending in the last two years; consequently it is of little surprise that its economic growth has been the highest in the region.
There is also international economic activity. Undoubtedly, there have been increased financial turbulence and this has resulted in headwinds, and dampened sentiments in certain sectors.
What we also know is that the re-allocation of capital (which has been underway for more than a year now towards the mid-market real estate) has capitalised on trends such as “surban” communities, price levels, and increased access to bank financing (shown in the steady rise of mortgage activity on a year-over-year basis for the last five years).
This puts to rest the argument that there is not enough demand in this space. Instead what appears to be the case is that unlike previous cycles, the market appears to be “well supplied”, analogous to what was witnessed in the oil markets.
Similar to the latter, prices have not only proved resilient in the last six months, but started to exhibit a gradual steady firming pattern. Data, as well as historical evidence, suggests that this will likely continue.
The writer is Managing Director of Global Capital Partners.