Is Now The Time To Be Brave?

The most commonly asked question from potential buyers in today’s market must be, “is now the right time to buy?”.

The answer to that question is far more reliant on an individual’s circumstance rather than a macro view of the market, however in general terms a cyclical property market offers up different opportunities at different times and I have always been a fan of the old Rothschild’s quote that the best time to invest is “when there’s blood in the streets.” However, the problem with investing when there is “blood in the streets”, the lowest point in the market cycle, is that it is scary and there is no way of knowing if the bottom has been reached or if there is further to fall.

Most investors miss the window of opportunity as they sit on their hands, fearful of catching a falling knife, and by the time they realise the bottom has passed, it is too late.

Possible market reversal

Property prices in Dubai have been falling steadily now for 4 years since the last peak in 2014 and it is generally accepted that most full cycles last between 7 and 10 years. That would suggest we are due a reversal in market fortunes in the near future and I have been having more conversations recently with investors expressing a more bullish view of the market for the coming years.

But is this embryonic growth in confidence justified?

Is this the window of opportunity all investors have been waiting for or are there more tough years ahead?

Is there enough blood on the street and is now the time to be brave?

Those fearful of the current market will point towards continued oversupply as the major danger to any recovery. In H1 we saw slightly over 7,000 units handed over but that number is likely to double in Q3 and there are reports of up to 58,000 new units entering the market in 2019 and 2020. Who is going to buy and live in these properties? Surely such large numbers of new property can only outstrip demand in the short to medium terms and put further downward pressure on prices?

The population of tomorrow

The counterargument first points out that Dubai is building for the population of tomorrow, and in a city whose population has grown 1,000 per cent in the last 40 years, who would argue against that? With a relatively modest population in global terms of 3.1m, there is certainly plenty of room for growth, and if predictions 5m by 2027 are correct, the long term value for Dubai’s housing stock looks solid.

Secondly, it is highly unlikely that new build delivery will reach 58,000, with many commentators suggesting that looking at past developer performance, delivery can be expected to be more in the region of 30,000 in the next two years. The froth in the off plan market which has fueled development in the last few years seems to be abating and it is likely developers themselves will begin to curtail supply to maintain values in the medium term.

Thirdly, there is evidence that buyer confidence is slowly starting to return to a market that has seen prices fall since the last peak in 2014. A growing economy, rising oil prices and increase in government investment post VAT will have a positive impact on jobs and wages, and while interest rates have started to rise, EIBOR rises seem to be being managed sensibly which should easy concerns for investors looking to leverage. Buyer sentiment has been helped by the welcome news of 100% foreign company ownership and 10 year VISAs which will encourage international investment, boost local entrepreneurship and give certainty and stability to residents. A loosening of the 25% deposit criteria for mortgages would be a welcome boost to the market, but as it stands we are already seeing increased activity from first time buyers and homeowners looking to trade up who are attracted by today’s prices.

Increase in activity from institutional investors

Perhaps the biggest indication that buyer sentiment may be changing for positive is the increase in activity from institutional investors. Large investors recognise that today’s prices represent extremely good value both in a historical and geographic sense. While rents have also dropped, yields have held firm on the back of reduced capital outlay, and with ENBD REIT (Real Estate Investment Trust) reporting a modest growth in yield from 8.3% to 8.4% there are more trusts and funds set to enter the market to take advantage of today’s prices. When the institutions start buying, individual investors should take note.

Post Expo?

Finally, it is worth taking a moment to consider Expo 2020. There is the obvious economic activity on the lead up to Expo that many people have spoken about in the past, but it is the post Expo world that interests me more. It is predicted that 25m to 30m visitors will come to Expo 2020, and even if the numbers turn out to be somewhat lower, that is a huge number of people who will be exposed to Dubai for the first time. Unlike previous Expo cities, Dubai is an expat city full of residents who visited once for business or leisure and decided to settle and there is a potential large increase in population to be seen post 2020 which could make today’s glut of property quickly turn into a shortage.

Fortune favours the brave

Today’s market undoubtedly faces challenges from upcoming supply, creeping interest rates and a strengthening dollar, and many investors remain fearful for the future. However, none of these threats are insurmountable, nor of the scale of challenge seen in the Financial Crisis, and for anyone taking a mid to long term view on investing in UAE property there are lots of reasons to be optimistic. We will never know if the bottom of a market cycle has been reached until it has passed, and it does take a certain amount of bravery to invest while others are scared, but there is genuine value in todays market and I think we might look back on 2018 as one of those years where the fortunes once again favour the brave.

Words from Richard Waind, Head of Brokerage at Betterhomes.

Published in Gulf News.