How other currencies affect Dubai market

Without a reliable data set spanning multiple decades, it would be challenging to develop a single and accurate forecasting mechanism.Jesse Downs, Managing Director, Phidar Advisory

Ever since the Dubai real estate market has been opened to foreigners, it has attracted a number of investors from India, Pakistan and Great Britain. Jesse Downs, managing director of Phidar Advisory, takes a closer look at how the performance of currencies in these countries affects the property market in Dubai.

Current scenario

The Dubai realty market is often quieter in the summer months, except when there is a market boom underway. This summer, the difference was the presence of capital waiting in the wings, searching for yield. Buyers are holding out for higher yields than sellers are willing to accept, so transactions are at a stalemate. Aside from a few distressed and exchange rate-motivated sales, market activity is minimal. But there is capital ready to be deployed at the right prices.

Apartment lease rates decreased at 0.4 per cent while sales prices decreased at 2.7 per cent, pushing gross yields up to 7.4 per cent. Lease rates for villas decreased at 1.3 per cent while sales prices decreased at 2.6 per cent, pushing gross yields up to 4.8 per cent. Yield is the total rent divided by the total cost of property.

The current yield expansion is a necessary and healthy factor in the ongoing market correction. In the first half of 2015, apartment transaction volumes were up 3 per cent compared to the same period in 2014, but villa transactions were down at 3.2 per cent compared to H1 2014.

US dollar

Since the dirham is pegged to the US dollar, currency fluctuations directly impact the cost of UAE real estate for most foreign investors. For example, if the Indian rupee depreciates against the dollar, an Indian buyer needs to spend more in Indian rupees to buy a house. Inversely, Indian property owners who purchased when the rupee was relatively strong may now be able to sell their property, potentially at a loss in terms of property value in dirham, but still generate profit when converting dirham to rupee.

The US dollar remains strong in spite of recent volatility, which means most other currencies have weakened against the dollar. Historically, Indian, British and Pakistani investors have topped the list of foreign buyers of Dubai real estate. It is not surprising that analysis found a significant, strong and deterministic link between the Indian rupee, British pound, Pakistani rupee and Dubai residential property prices as measured by apartment prices.

These three exchange rates matter. There are other factors that can and will impact the Dubai market, which is still relatively opaque so such tools are important for market assessment. Without a reliable data set spanning multiple decades, it would be challenging to develop a single and accurate forecasting mechanism.

Initial statistical analysis indicates a relationship between sustained low oil prices and Dubai’s GDP. If oil remains low through 2016, the market could start to feel an impact through slowed economic and job growth, possibly starting as early as Q4 2016, but most likely in 2017.

The fundamentals do not support a short-term rebound. In the context of current global volatility, it is difficult to justify yield compression, or even yield stability, in the short term. Yield compression refers to the fall in yields of a property either due to falling rents or rising prices. In fact, volatility can indicate a need for yield expansion because volatility is a common measure of risk. Sellers holding out for a rebound may have to wait for three to four years or more.

Office market

In the second quarter of 2015, both nominal gross lease rates and nominal sales prices declined quarter on quarter, with -2.9 per cent and -2 per cent, respectively. Gross lease rates declined more significantly, compressing yields to a historical low of 6.8 per cent. Declines were driven by large supply expansion in the first two quarters, just under 4.5 million square feet, as well as the expected completion of an additional 1.4 million square feet of office space before the end of the year.

The areas with the most significant supply expansion include the Dubai Design District, Business Bay and Tecom C. In 2016, this list will include JLT, with over 700,000 square feet of office space due for handover. Construction status in current projects is highly variable, a sign of general market fluidity.

Source: S. Dhar, Special to Freehold


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