Is it possible for oil to affect realty?

Is it possible for oil to affect realty?Mohanad Alwadiya

Everybody knows that oil is really important. To dismiss the effects of shifts in supply, demand and prices on economies will be akin to denying history and ignoring logic. But those who overestimate the consequences of the tumultuous oil industry only exacerbate fear of unlikely events.

We should have learned from the recent global financial crisis that cooler heads should prevail in times of stress. The recent reactions to the dramatic reduction in oil prices have been disturbing and far from rational.

The need for a balanced analysis

The reactions of global stock markets were noteworthy because of their rapidity and severity. They were also significant because of the lack of cool-headed analysis that should have been applied to save the situation.

The old adage of panic breeds panic sprung to mind as I received a flurry of phone calls from investor clients, finance brokers and journalists. But it also gave me an idea of the level of unease surrounding the likely effects of oil prices on Dubai's real estate industry.

I was surprised at the short-sightedness of the opinions being offered. A balanced analysis of what a decline in oil prices really means in terms of demand for Dubai's real estate in the long term was absent.

Those in the oil industry understand that given the costs of exploration and high level of capital required to commence greenfield operations, possible price fluctuations must be carefully considered to ensure continuity of profitable operations. In ensuring that excess profits are reserved for when prices fall, established players in the industry can smoothen out the peaks and troughs of oil revenues.

The UAE protected

So, while many doomsayers were predicting a halt in public spending and infrastructural investment in the UAE, they forgot that a decade of record oil prices has enabled Abu Dhabi alone to accumulate an estimated $800 billion (about Dh2.9 trillion) in reserves. Needless to say, it would take a long duration of severely depressed oil prices for these reserves to be diminished.

Additionally, with an economy that has diversified to the extent that only 6 per cent of Dubai's GDP is reliant upon oil, and the fact that lower prices will assist the growth of trade and tourism, the emirate does not appear to be particularly vulnerable to a temporary dip.

Similarly, non-government oil conglomerates that enjoy lower costs of production due to more established operations and low-cost extraction methods are also in a position to absorb the fall. It is only high-cost operations, some of which are highly leveraged, that face a threat. But as they say, there is nothing like a good industry shake-out to bring markets back to a state of equilibrium.

In the short term

There are several advantages to lower oil prices in the short term. If you come from a country that has to import all its energy supplies, then a decrease in the price of oil can lower costs in sectors such as manufacturing, distribution, travel, tourism and transport.

This will allow an increase in disposable incomes, which can, in turn, significantly contribute to economic growth. And every country in the world is chasing that dream at present.

Many investors who enjoy returns from Dubai's real estate market hail from countries such as India, which can benefit enormously from cheaper energy. In fact, other than Russia, which is mired in many more serious issues, a vast majority of people comprising the Dubai investor mix will not be affected and perhaps even tangibly benefit from lower oil prices.

So why the panic? Most players and stakeholders agree that Dubai's real estate industry has achieved a level of maturity that led to a successful rebound. Why would it succumb to this latest development and collapse?

As an industry, we need to embrace changes and challenges. How we analyse and address them is a measure of maturity. And it seems we have some way to go.

Find out how UAE is taking advantage of its endless sun

Source: Mohanad Alwadiya, Special to Property Weekly


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