Amid a couple of weeks of extraordinary volatility in global financial markets, it was somewhat of an anticlimax to witness that the markets for the most part ended where they began, or in some cases even higher than their pre-referendum levels.
With the exception of the GBP (which is forecast to head lower still), most financial assets had recouped their losses, with pundits who were earlier talking about an imminent Armageddon, now reversing course and stating that the impact would likely be limited.
However, this has not deterred commentary on the subject still ratcheting to near deafening levels, with an increasing army of analysts opining the Brexit impact on global and Middle Eastern real estate markets. It is these claims that need to be scrutinised in light of history to ascertain the probable future direction these markets will take.
UK-based investors have been a significant percentage of freehold real estate purchasers in Dubai, rising from under 3 per cent in 2012 to 8.6 per cent in 2015. In absolute terms, the quantum of investment has increased from Dh2.1 billion in 2007 to Dh5 billion in 2012, and doubling further to Dh10.88 billion by end 2015.
These investments have steadily risen amid a backdrop of a currency that appears to have systematically depreciated against the dollar during this time. In 2007, the range of the pound to the dollar was 1.96 to 2.07; in 2012 it trended lower, ranging from 1.54 to 1.62; and in 2015 this reduced further to 1.47 to 1.57 levels.
A correlation analysis of investment inflows against the currency movements during the last 10 years reveals a mildly positive relationship of under 0.15, suggesting that while currency movements are a factor, there are a number of other variables that have overwhelmed the systematic depreciation of the pound during this time frame. This further implies that the panic has been somewhat exaggerated.
What could these variables be? Apart from the obvious plays such as the higher dividend yield, and the relatively attractive price valuations, they reflect a cornucopia of factors that include relative infrastructure spend, growing immigration into the UAE, relative growth differentials and prospects for further job creation and growth.
Indeed, amid all the uncertainty surrounding the region, it is heartening to note that fiscal spending in the UAE has actually increased, funded by an increasing array of fiscal variables such as indirect taxation, and more importantly sovereign bond issuance. This suggests that the pace of job creation is likely to be robust in the next 12 months and the run up to the World 2020 Expo.
Indeed, in the short term, with prognostications of further monetary stimulus by central banks, it is not only likely that the pace of debt issuance will further increase (on the back of record low interest rates) but that real estate and infrastructure in the UAE will continue to be a beneficiary as investors continue to search for yield. This implies that fears of a weakening currency on real estate investment have been overblown at best.
There is a further variable that the markets have undoubtedly factored in: with prospects of increasing uncertainty after Brexit, there remains a bearish outlook for the pound against the dollar for the foreseeable future, with some analysts even calling for a parity with the dollar in the next two to three years.
While it is difficult to determine currency movements, history suggests the pound has been in secular decline against the dollar for a decade now. And it is this secular regime embedded in the exchange rate that provides a critical insight into the behaviour of foreign investors.
A University of Chicago Study on currency regimes reveals that investor expectations of a currency decline that is anticipated by participants actually leads to an increase in outflows even as the currency continues to decline. This suggests that real estate investments in Dubai and the UAE may well increase, accelerated by uncertainty surrounding London’s status in commercial real estate.
And Dubai may well prove to be a prime beneficiary in this regard, given its status as a regional financial hub.
The impact of Brexit will likely be played out over the next few years on the global economic stage, with consequences that will continue to roil and push markets in unexpected ways. What history counsels, however, is that the fear of a weakening currency and its impact on foreign real estate markets is likely exaggerated.
There might well be a positive impact on markets such as Dubai as foreign flows continue to gather pace, especially in light of the ensuing uncertainty that has been created as a result of the referendum. Investors would be well advised to continue to focus on the fundamentals, rather than the “headlines” that these events create.
These fundamentals continue to suggest a period of strengthening economic indicators for Dubai and the UAE, with a strong positive feedback loop into real estate asset values.
The writer is Managing Director of Global Capital Partners.