Investors in both the real estate and stock markets have enjoyed extravagant returns over the past five years, but now doubts are starting to creep in. Can the fun continue?
Property and share prices have rebounded sharply since the 2008 crash, driven upwards by low interest rates, quantitative easing (QE), and the feeble returns on cash.
Last year, the Dubai Financial Market General Index grew a dizzying 88.3 per cent, but it has fallen sharply in recent months, as investors run for cover following large losses at the construction giant Arabtec.
Residential prices in Dubai leapt 51 per cent in 2013, according to the global estate agency Cluttons, but now many fear the market is overheating.
The Australian expat Evan Grous and his wife Tiina are both delighted and relieved to have signed a memorandum of understanding (MoU) on their town house in Jumeirah Village Circle in January 2013, before prices doubled.
They funded the purchase by transferring some of the funds from Australia using the currency service Moneycorp, and taking out a local mortgage. “We expected prices to move higher, and thankfully our timing was good,” Mr Grous says.
The new property is a family home, where Evan and Tiina, both 47, will live with their daughters Zoe, 10, and Popi, eight.
Buying a home of your own is always a great investment, says Mr Grous, a human resources consultant who has lived in Dubai for eight years, because it means you no longer have to pay thousands of dirhams in rent every month.
Like all wise investors, they are taking a long-term view. “We’re not banking on spectacular returns, those days are over, but we do expect prices to rise steadily over the seven to 10 years that we plan to live there.”
Mr Grous and his wife also own three properties in Australia. “Property is an important part of a balanced investment portfolio, provided you are cautious in today’s hot market. Given rapid recent growth, and the threat of rising interest rates, I would be cautious about investing in property today,” he says.
Despite the current panic globally, the underlying property market in the UAE remains in good health, says Warren Philliskirk, associate director at Mortgage International Business in Dubai.
Speculators have been driven out by new rules aimed at preventing speculation, such as the UAE Central Bank’s recent demand that buyers in the Emirates put down bigger deposits, and the Dubai Land Department’s doubling of transaction fees from 2 to 4 per cent. “Now most buyers are end-users, people who plan to live in the property themselves, rather than looking to make a quick profit,” Mr Philliskirk says. “This should make the market much less volatile.”
The Dubai Government is also said to be planning a crackdown on flipping off-plan properties, possibly by charging new fees on off-plan sales, or introducing other restrictions.
Mr Philliskirk says slower growth should actually make property a better long-term investment.
“I’d say we’re looking at steady growth of around 5 per cent a year. That is still a healthy return, and should help avoid a repeat of the 2008 crash,” he says adding that you can never rule out a market correction. “We might see a 5 or 10 per cent dip at some time, but nothing like the 50 per cent drop we saw in 2008. If you’re planning to hold your Dubai property for up to 10 years, you should still come out nicely ahead, whatever short-term troubles we face.”
Dubai isn’t the only global property market that looks set to slow. The property specialist Knight Frank reports that global house prices rose by 0.6 per cent in the first three months of this year, half the 1.2 per cent growth of the final quarter of 2013.
There are even signs that the rampant prime central London property market is finally calming.
One danger with investing in property is that you are putting a lot of money into a single “illiquid” investment, which can be difficult to sell if you want your money back in a hurry.
UAE expats buying outside the Emirates have another risk to contend with – the shifting sands of currency movements, says Andrew Woolley at the foreign exchange transfer service Moneycorp. “Buying a property is a major investment – it can cost you hundreds of thousands of dollars, which means you have massive exposure to the fortunes of the currency where you are buying.”
You can use a currency transfer service to hedge against risk for the first couple of years, but after that you are at the mercy of the market, Mr Woolley says, adding: “Currency risk can work in your favour, turbocharging your profits when you finally sell, but it can also move against you.”
This risk is easier to mitigate when investing in shares, as it is far easier to spread your money between different regions, markets and sectors.
But markets are also showing signs of tiring after their recent frenetic performance, says Jeremy Batstone-Carr at Charles Stanley Stockbrokers, who advises clients in Dubai.
He isn’t surprised by the recent UAE reversal, since he has been predicting a global stock market sell-off for the last 18 months. “QE has driven global share prices sky-high, but now the US Federal Reserve is steadily turning off the liquidity tap. Emerging markets have been driven higher in recent years by trillions of freshly-minted money, but now that process is coming to an end, and there could be bumpier times ahead,” says Mr Batstone-Carr.
China is urgently trying to deflate a credit and property bubble, Russia’s Ukrainian policy risks punitive US sanctions, while Brazil is grappling with rising inflation, falling consumption and electoral uncertainty.
Their stock markets are all down over three years and look set to remain turbulent, adds Mr Batstone-Carr. “The Middle East, South Africa and Turkey may also remain unsettled.” he says. “India is the exception. It has settled well following the sweeping election victory of the BJP party’s Narendra Modi, and stock markets are up more than 20 per cent in the last year.”
Given current uncertainties, developed markets such as the UK and US look more attractive at the moment, he says.
Mr Batstone-Carr adds that the days of easy money aren’t quite over yet: “In Japan, the prime minister Shinzo Abe has unleashed a monetary blitz in an attempt to pull the country out of its torpor, while European Central Bank president Mario Draghi looks set to do the same in the euro zone. This could drive share prices higher in these markets.”
Investors should approach today’s troubled markets with caution, says Steve Gregory, managing partner at financial services company Holborn Assets in Dubai. “Global stocks are in difficult territory. For the US, modest stock market growth of around 2.4 per cent a year is probable. The UK and Europe look promising this year, but growth will be slower beyond that.”
But a further dip in markets could throw up attractive long-term buying opportunities. “Investing in emerging markets now could pay off strongly if you can hold until 2020 and beyond,” Mr Gregory says.
Future market movements are hard to call, so it makes sense to have a spread of investments in your portfolio, including property, equities, cash and bonds, says Rupert Connor, an independent financial adviser based in Dubai. “Diversification reduces risk, because it means you don’t have all your eggs in one basket. The ideal asset allocation differs from investor to investor, depending on how much risk you are prepared to accept, so you may need to take financial advice to build the right portfolio for you.”
The recent UAE stock market dip has spooked many investors. The next five years look set to be more troubled than the last five, but long-term investors should still weather the storms.
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