Many factors have affected the real estate sector over the last two years, but the industry remains resilient and investment opportunities abundant as the country looks to the future according to Ryan Fansa, Director, Head of Real Estate, Al Masah Capital.
U.A.E. Macroeconomic Environment Overview
From 2012 to 2014, the U.A.E. experienced a long-awaited upswing in economic growth since the global financial crisis. Effective governance at the emirate and federal levels, high oil prices, the recovering global economy and the tourism boom all coincided with the economy’s return to health and pre-global recession growth rates. Incidentally, while the majority of the region has been embroiled in political turmoil, the U.A.E. has managed to maintain stability and further develop its infrastructure. This in turn has made the U.A.E. well positioned to attract investors from countries with weak economies, thereby maximizing its ability to stimulate growth beyond its oil sector.
The Effect of Global Oil Price Fluctuations and Brexit
The global oil market has been oversupplied since oil prices took a tumble in the summer of 2014, decreasing by about 50% from previous levels. Inevitably, this has had an impact on oil-producing countries, with many GCC governments taking austerity measures to soften the blow. As a result, economic growth has slowed in the U.A.E. in the past year and a half. Given the country’s diversified economy however, steady growth is expected with a forecasted rate of 3%.
In addition to global oil price fluctuations, worldwide events continue to weigh down on the global economy. We are starting to enter a new era of uncertainty: the Brexit referendum prompted an international meltdown and fears regarding international security are swelling. Nevertheless, it’s too early to determine the impact of the UK referendum on the U.A.E. real estate market given the unprecedented nature of the situation.
U.A.E. GDP Composition
While the region is heavily dependent on oil revenues, Dubai has many industries that signify strong economic performance in its GDP. According to the Dubai Statistics Center, in 2015 the oil and gas industry made up approximately 2% of Dubai’s GDP, whereas the construction and real estate industry made up roughly 22%. Other industries, such as wholesale and retail, as well as transportation, storage, and communications, made up 29% and 15% respectively. The manufacturing, tourism and hospitality sectors have also emerged as major drivers of economic growth.
Down south, Abu Dhabi’s economy is telling a much different story. According to statistics from 2015, the capital is much more reliant on oil revenues than its sister city. The oil and gas industry contributes a hefty 49.2% to Abu Dhabi’s GDP, whereas construction and real estate make up a much lower 17%. However, in line with Abu Dhabi’s Vision 2030, the capital is gradually diversifying its economic activities in the manufacturing, tourism and real estate sectors.
Generally, the U.A.E. is leading in economic diversification among its neighbors in the GCC, with the real estate industry considered a cornerstone of its economy. Furthermore, despite the recent dip in oil prices, the U.A.E.’s GDP is predicted to grow at a rate of 3%.
Diversification into Real Estate
Real estate is considered a unique asset class for investment because its typical lifecycle ensures long-term profitability. Moreover, real estate not only backs up the possibility for financing and/or securitization, but physically locates itself within the wider society’s infrastructure—proving to be an attractive asset class even when market sentiment is low.
The U.A.E. generally maintains a positive outlook on the economy due to the strength of its real estate sector. So it’s unsurprising that regional and international investors find themselves looking to the U.A.E. when diversifying their portfolios. Moreover, the country will likely remain ripe for investment in the years to come due to favorable demographic trends and a continued influx of new expats.
The U.A.E. is one of the first GCC countries to envision a future of economic diversification and growth independent of oil revenues, and its tourism sector will definitely spearhead that initiative. Not only is the country poised to host the Expo 2020, a major upcoming global event, but it will also be an indirect beneficiary of the FIFA World Cup 2022 in Qatar. While lower oil prices have affected the global economy in many ways, they’ve made an unlikely, positive impact on the U.A.E.’s real estate market by limiting speculative forces and bringing property prices down to more affordable levels. Therefore the overall investment environment has improved with more sound opportunities for long-term investors.
Given the above, it’s not difficult to conclude that investing in real estate projects is still considered rewarding. However, opportunities with equivalent investment value also lay in existing developments and in high-demand areas with lucrative returns for the long term. One can approach the real estate market with confidence given the measures in place to safeguard investment opportunities from market fluctuations.
The current investment climate presents favorable conditions: the shortage of liquidity driven by market uncertainty, which offers plenty of investment opportunities for the “wait-and-see” investors holding onto their cash, and the overstretched businesses servicing the oil industry. For those in that position who also hold a long-term perspective and available liquidity, there are plentiful quality deals at a lower valuation offering you and the many motivated sellers a way out.
With Dubai’s exceptional economic forecast, bolstered by Expo 2020 and the Vision 2021, as well as Abu Dhabi 2030 Urban Planning Vision, the U.A.E. has established itself as the most favorable investment destination in the region. Despite the crash in oil prices, the U.A.E. economy has demonstrated its resilience and the vast potential of its non-oil sectors. In particular, consumer confidence, population growth and the influx of foreign capital have been instrumental in driving growth in the region’s real estate industry, providing an abundant number of opportunities where secure and safe capital can be achieved.
Sources: IMF, Dubai Statistics Center, Statistics Centre Abu Dhabi