Find out if oil woes can spill into real estate

Find out if oil woes can spill into real estateImage Credit: Supplied

When Dubai unveiled its Dh41-billion budget last month, the government was clearly demonstrating that infrastructure spending would not be affected by a free fall in global oil markets that has seen prices drop by more than 50 per cent. The authorities were keen to stress that as oil only accounts for 4 per cent of government revenues, the budget would not be affected by falling prices.

The emirate, which is ramping up development ahead of the World Expo 2020 amid a tourism boom, has vast capital reserves and an economy diversified enough to weather the storm. Experts say a slowdown in construction projects is therefore unlikely, and new developments in the tourism, retail and infrastructure sectors will go ahead. All this is helping the emirate and the UAE move away from a reliance on oil.

''The key point we've made is that the UAE should be able to withstand a period of lower oil prices relatively well,'' says Jason Tuvey, Middle East Economist at Capital Economics in London. ''Its economy is by far the most diversified in the Gulf and the government's large savings mean that it is well placed to sustain spending.''

Regardless, the UAE real estate market will undoubtedly feel at least some impact from the ongoing oil price slide. The market had already tapered off at the end of last year, and although the UAE has made progress in diversifying its economy, oil still accounts for more than 75 per cent of the country's revenue and much of its other businesses are connected to oil and the wider oil and gas sector — even in Dubai.

Matthew Green, Head of Research and Consultancy — UAE at CBRE, says, ''A sustained period of lower oil pricing will have some major negative impact in the Middle East, a region that is driven by the proceeds of the hydrocarbon industry.''

Therefore, declining oil prices present a macroeconomic risk to the UAE as they do to the rest of the GCC. Prices dropped from more than $110 (Dh404) a barrel in June to around $47 last month. A recent Goldman Sachs report suggests that they could fall further, with the bank forecasting oil trading at an average of $42 a barrel in the first quarter. ''Although GCC governments are maintaining current spending commitments, continuing sliding oil prices could lead to governments reining in spending on infrastructure and real estate projects and possibly a reduction of subsidies, leading to lower disposable incomes,'' says Martin Cooper, Director at Deloitte.

It is this last point that is key in how the price uncertainty will affect the UAE real estate market. Regardless of Dubai's or Abu Dhabi's ability to pay the bills for new projects, potential investors may feel that the time is not right to buy, particularly if an ongoing slump will cause either cuts in salaries or prices to fall further.

''Ultimately, lower oil prices in the long term mean lower economic growth and thus fewer new jobs,'' says Green. ''This, in turn, will directly impact all sectors of the real estate market, from new housing requirements and office leasing to tourism, retail and industrial.

''Uncertainty is also likely to lead consumers to be more prudent in their spending, potentially cutting back on non-essential items until more clarity on the economic situation emerges.''

Green points to the impact that has already been felt in the UAE after the Russian rouble crisis, which has caused a huge drop in arrivals from Russia, affecting everything from hotel occupancy to retail sales. The political and economic improvement in Egypt has also seen many Russians heading there. The effect of this, according to CBRE, was that hotel occupancy averaged 78 per cent last year, down from more than 80 per cent in 2013.

Likewise, lower oil prices have already affected the UAE property market. In the second half of last year, sales volumes were down 20 per cent, and analysts expect a downward trend in the first quarter this year. There is yet to be any noticeable slowdown in the commercial sector, but it is still early days: the oil and gas industry is well represented in the sector in both emirates.

A key indicator of residential real estate is the performance of the Dubai Financial Market (DFM) and the Abu Dhabi Stock Exchange (ADX), with a fall on either bourse usually mirrored in the property market due to the heavy weighting of property, construction and ancillary companies on both exchanges as well as the general effect of a stock market fall on sentiment.

Both DFM and ADX took a hit late last year when the impact of oil prices began to kick in. Despite a run of initial public offerings and a steady rise this year, the DFM was down 22 per cent on the year last month. The ADX remained flat.

But some argue that a limited slowdown in some areas of the market may not be a bad thing. In Abu Dhabi, for example, there has long been massive oversupply in the commercial property sector; a lull in development of new projects is allowing rents to catch up and the sector has significant momentum going into this year.

''As large pipeline inventories have been absorbed, Abu Dhabi's previously oversupplied real estate market is now moving closer towards parity. This is particularly evident in the residential sector, where declining quality pipeline inventories and sustained demand, combined with the removal of the rental cap, are likely to drive growth in rental prices this year,'' says Cooper. However, he warns that risks remain, including the huge volume of planned retail mall developments over the next two to three years in the emirate.

Pledge to spend

But analysts take heart from this year's ambitious budgets such as that of Dubai, which amount to a pledge that even if prices continue to fall, the emirate will dip into its significant savings to fund infrastructure and other development projects. This is all the more critical in Dubai, where preparations for the World Expo are well under way.

Such a commitment is capable of lifting the construction and real estate industries across the board.

In a report at the end of last year, real estate consultancy Knight Frank pointed out that large publicly funded, infrastructure-related schemes have a stimulating effect on construction across the board. It also indicated that there is plenty scheduled to be built.

Furthermore, the total value of contracts awarded in the GCC is projected to rise to approximately $196 billion this year from almost $160 billion last year — an annual increase of 22 per cent, according to a recent report by Ventures Middle East.

''This year's UAE budget has been set with an increase in public spending over last year... [which] sends out a positive message about the strength of the UAE economy and further underlines the importance of the country's fiscal buffer that has been built up during a period of relatively high oil pricing in recent years,'' says Green. ''It will effectively allow the government to spend budget surpluses to help insulate and stimulate the economy during a period of fresh local and global uncertainties.''

The drop in prices is likely to lead to growth in oil importing economies such as India, China and those in Europe, with the International Monetary Fund suggesting that a 30 per cent fall could have a 0.8 per cent boost in developed economies.

Given the huge number of potential Indian and European investors in the UAE, this could have a positive effect on real estate. In the first half of last year around three-quarters of real estate investors were expatriates.

There are some who have found echoes of 2008 in the current situation, but analysts feel that such comparisons are unfounded.

Harshjit Oza, Assistant Director of Research at Naeem Brokerage, argues that although spending patterns are expected to change if the price of crude remains low, Dubai—and the UAE — is very different today from the one that entered the financial crisis.

''This time the UAE is more reliant on real estate, tourism and retail spending rather than income from oil and gas. I don't think lower oil prices is going to lead to a 2008 type of crisis,'' says Oza. ''I think it is an exaggeration to draw such a conclusion.''

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Source: Orlando Crowcroft, Special to Property Weekly


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