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During the week commencing October 12, the Dubai Financial Market General Index fell 5 per cent to close at 4,270.43. That's a 14 per cent slide over the course of that week alone, the most since December 2008. Last week saw a slight upturn, however, the impact this will have on global confidence in the Dubai market as a whole remains to be seen. It is inevitable that the stock market affects investment into other market sectors and with real estate making up 66 per cent of total local market value (as it stood on October 20), this is the sector in need of considerable attention to protect ourselves from another confidence crisis.
There have been a number of factors influencing the Dubai market dip: the 20 per cent drop in crude oil price, the Ebola outbreak, restrictions on international travel and the high volatility of the European and Chinese markets. Stock prices are dropping globally, with economies worldwide showing signs of slowing.
From a global viewpoint, the epicentre of economic worries is Europe. It's the European banks that are trying to tackle the weakest inflation in almost five years and investors are betting it will deteriorate further amid signs that powerhouse Germany is now faltering. This will inevitably weigh on commodity prices, creating more volatility in financial markets, stemming from Europe and seeping out into the world's leading economies.
Independent of the stock market, both Dubai sales and rent prices have gone down, according to a recent report from Asteco. After ten consecutive quarters of increases, the report states that average apartment rents fell 2 per cent during the three months to the end of September, while average villa rents dipped 3 per cent. In terms of sales, apartment prices in Dubai Marina and villa prices in Victory Heights and Jumeirah Islands were subjected to the steepest falls, all dipping by 8 per cent.
Dubai's luxury villa market recorded some of the biggest drops, with prices for villas in Arabian Ranches down 6 per cent to between Dh850 and Dh1,450 per square foot. While these figures are an indication of a general drop in real estate value, albeit gradual compared to the stock market, we have witnessed this firsthand on the ground and can advise that, in fact, there has been a dip of closer to 12 per cent in the villa market value.
Espace's figures are a few months ahead of those in the Asteco report due to the time required for data compilation, analysis and publication. So it's clear that market value is going down in the ready property market.
The report also suggests the decline is due to the number of new homes increasing, with supply exceeding demand. Buyers are also struggling to meet the strict loan to-value caps imposed on mortgages by the UAE Central Bank. This, ironically, is a good indication that global confidence in the Middle Eastern real estate market has been improving, with both local and international developers completing and starting huge projects, especially here in Dubai.
Our off-plan department has seen considerable turnover of property coming onto our books and being sold. This is a great indication that local investment opportunities within this sector are being taken up. That said, this was all prior to the recent media hype about the global economy and the subsequent effect on Dubai's stock exchange, so what happens next?
Stock market's impact
Macroeconomic variables, such as the stock market, building permits and development starts, fluctuate in patterns that are all interlinked. As the economy pulls away from the recession, investors, anticipating an increase in real estate developments, begin to buy construction-related stocks, fuelling market movement.
On the whole, rising stock market prices tend to precede the rise of the real estate market. The property and stock markets are interconnected in a number of ways. Major developers' shares are traded on the stock market and this is probably the area most effected, due to the economic value of these projects.
Then, of course, there are the home improvement companies, which are tied to home building, also trading on the stock exchange. The real estate sector reaches deep into the economy as furniture manufacturers, plumbers, landscapers and other businesses are all dependent upon and, therefore, affected by changes within the real estate market.
The real estate and construction markets and the financial market are leading generators of economic activity. They combine for around 80 per cent of total Dubai stock market value, with real estate and construction accounting for around 55 per cent and the financial market 25 per cent.
Consumer confidence is a major consideration when people purchase real estate. Few people are likely to commit to a mortgage if they feel their economic future is uncertain or if capital gain is likely to plummet. This market in particular has a number of fear factors attached to potential consequences such as bounced cheques.
When the stock market goes down, as recent reports have suggested, and the value of portfolios declines, investors are impacted psychologically. We saw this argument time and time again between 2008 and 2012, with governments globally arguing that they would be able to alleviate the depression simply by a mindset change.
Even if the portfolios are in Individual Retirement Accounts, which will not be touched for years, people's confidence is shaken. Loss of confidence can easily spread, affecting others who are not financially hurt, but are nevertheless unnerved by news surrounding the economy, even though it is neither real nor sustained.
Down payments for real estate purchases have varied in the past, but following the housing crash that began in 2007, credit requirements tightened. Lenders began requiring larger down payments. For some homebuyers, the funds for their down payment come from their stock portfolios. When the stock market slides, so does the net worth of investors.
Without the necessary liquidity to make the down payments, homebuyers are forced to defer their purchases. Rising stock prices restore portfolio values, in turn creating the funds for purchasing property.
As the value of stock portfolios increases, investors can look at other investment opportunities to diversify their holdings. Real estate is one alternative. Families will purchase second homes or lock in current prices and rates by purchasing property or plots with the intent to extend or build later. Investors will purchase rental homes or off-plan property. What this means then is that if the stock market were to fall, it is likely that real estate prices would follow suit.
We have, in fact, seen the real estate market lead the way, however, there has been no major fear factor surrounding real estate as yet and I hope this short-lived dip will not negatively affect this market. If it does, I hope it is to further drive the realignment process and stabilize the sector faster.
Developers will not pull out as they are invested in the long-term and stock markets are subjected to much shorter peaks and troughs. We are already coming out of the recent dip so confidence loss has been stemmed already. We are likely to find that our sector has sustained confidence to a fair degree these past weeks, however, everything that affects investment potential will affect both the stock and real estate markets alike.
Nothing to worry about
Because real estate makes up well over half of the total local stock market value, I think the need to stabilize this sector, at a minimum, is an imminent one. The real estate market is going through a realignment process, with last year's regulations and fees being introduced.
Steps have already been taken to prevent the real estate market from experiencing the same decline that was seen in the stock market, however, it is inevitable that stock market depreciation will have an impact on real estate. The impact has, to a certain degree, already taken hold in the form of local buyers looking to invest overseas, such as in the UK. This trend is likely to continue as more stable markets promise lower but guaranteed high rental income yields and scope for capital growth.
There is also a need to educate property owners who are listing prices much higher than the actual market value, slowing down the end-user market. That said, it is cheaper to buy luxury residential property in Dubai than in 18 other cities around the world, ranging from Mumbai to Sydney.
Luxury property in London is around six times more costly than in Dubai, Hong Kong is seven times and Monaco ten times more expensive. On the upside, this news could lead to a shift in mindset and as a result property prices could come down, while international demand should go up.
A buyer's market means more activity and more activity equates to a more stimulated economy, thus returning global confidence in the Middle East and in turn bringing stock figures back up again.
Get to know the massive investments which has put Dubai in forefront
Source: Peter Calamari, Special to Property Weekly
Peter Calamari is Managing Director of Espace Real Estate. Working in the industry for more than 20 years, Calamari has a broad experience in real estate, from the tried-and-tested UK to the fast-paced and dynamic Dubai property market