Strong dollar weakens short-term demand for Dubai property

Foreign investment into Dubai's property sector is hurt by a stronger dollar in the short term – but not the long term.

Last week the ratings agency S&P said in a report that it expected property prices in Dubai to continue falling. Antonie Robertson / The National

The strengthening dollar has led to weaker demand for property in Dubai, but its effect on investment flows is short-term, according to a new study.

The report from Reidin/Global Capital Partners said that investment flows into Dubai actually strengthen from Indians and Pakistanis as the dollar rises, because these investors look to property in a dollar-pegged country as a hedge against the risk of domestic devaluation.

“Because these countries have a systematic tendency to devalue against the dollar, investors have factored that into account and they have moved towards actually putting more of their money outside,” said the Global Capital Partners managing director, Sameer Lakhani. “Only in the last year or so, where there have been hardly any movements, has the dollar flow stopped, because they have been looking at domestic opportunities.”

The report analysed property price movements in three major markets. It found that a strong dollar had almost no effect on capital flows into New York, but argued that there was a “a moderate inverse correlation” of investment flows into Singapore (-0.33) and Dubai (-0.28).

“The similarity between Singapore and Dubai is that both countries have relied on foreign capital flows for the development of their economy — not only real estate but generally,” said the Mr Lakhani said. “Structurally, they are very similar.”

In Dubai, he argued, the dollar affects short-term decision-making by investors from India, Pakistan and Great Britain, though in the long term capital flows from almost all of them has continued to increase.

For instance, although investment flows show a negative correlation of -0.28 when compared with dollar prices over one quarter, the correlation turns positive if measured over 12 months.

“Over three years or four years, in every single case inflows have increased, which tells you that currency movements are not really that much of a force over time in investment decision-making,” he said. “People will look at investment fundamentals.”

Mr Lakhani said this is particularly true of Saudi Arabian investors, who virtually doubled the amount of money invested into Dubai’s property market between Q2 2012-Q2 2016 despite both a strengthening dollar (to which the Saudi riyal is also pegged) and wavering domestic fortunes as a result of fluctuating oil prices. The report states that there is a positive correlation of 0.14 between stronger oil prices and Saudi investments in Dubai property.

“With the rebound in oil prices, we can expect Saudi buying in the market to increase,” the report said.

Last week the ratings agency S&P said in a report that it expected property prices in Dubai to continue falling, by between 5-10 per cent this year, following a decline of between 8-11 per cent in 2016. S&P said “the strength of the dollar is making the UAE increasingly expensive for tourists and low oil prices in 2016 have diminished purchasing power and weakened investor sentiment”.

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