16 August 2015

Dollars and Sense

After a decade of finding bargains in real estate markets against the backdrop of a secular weak US Dollar, as well as a regime of declining interest rates, foreign investors in the last year have faced the prospect of sharply higher housing prices in Dubai, as their nations’ currencies have fallen against the US dollar. In times of a weak dollar market, real estate prices have had greater rates of appreciation, when compared to that of a strong dollar.

Whilst there have been several factors that contribute to the under/over performance in each of these periods, it is clear that USD strength is a major variable in the contribution of returns of the sector. That could reshape certain global housing markets going forward (explaining in part why global real estate market returns have had significantly higher correlations in the past two years) as the baton shifts from an investor oriented market to that of an end user driven market.

The strength of the US Dollar since 2014 has had significant implications for the attractiveness of Dubai (and even the US housing market) for foreign investors, and has particularly affected markets that have been dominated by foreign investment flows. Developers have responded by offering an array of incentives via payment plans to cater to both the foreign investor base, as well as attract potential end users from the domestic market.

These macro variables have been the predominant factor behind rising correlations in the world real estate markets, rising from a decade wide correlation of 0.29 to 0.65 in the last two years, as a financial regime in the form of change has caught global investors off guard. Against the backdrop of lower oil prices, and a rising dollar and interest rates, speculative behavior will likely continue to subside, and transactional activity will remain subdued. This is positive news for the end user as it allows for the allocation of capital formation to an asset class that has historically been for the purposes of housing and longer term stability.

To download the full report click here: http://blog.reidin.com/PublicReports/unitas2015Q32.pdf