Optimism over Dubai realty is not misplaced

Property valuations at this point are built on stable fundamentals

“It’s tough to make predictions, especially about the future …” Yogi Berra.
For Dubai real estate, the year 2016 has been dominated by hand-wringing by analysts voicing concerns about further falls, and guarded optimism about a selective recovery in certain areas. Particularly in the mid-market, this seems to be the case.
Even as the discourse continues to fixate on macroeconomic factors, it’s worth scrutinising the arc of history to determine the underlying governing dynamics at play and its resultant impact on the markets.
One way to interpret the freehold data in Dubai is to stipulate that the two main corrections (2008 and late 2013) were primarily due to exogenous factors. The 2008 boom-bust scenario was a result of the contagion effect from the sub-prime crisis in America and Europe.
The second correction coincided with the strengthening of the dollar and accelerated due to the decline in oil prices and its impact on the Gulf economies. While this discourse has merit, it is worthwhile to note that in both cases, valuation criteria had started flashing warning signals in the months leading up to the correction.

These signals were hidden in plain sight and ignored by and large by the analyst community. Valuation criteria such as rental yields, bank debt, off-plan speculation, a surge in off-plan transactional activity, and a lopsided supply curve tilted towards the luxury (to attract hot money flows) were evident both in the first as well as the second cycle.
In both instances, these signals were seldom highlighted, and when they were, were pressed into the service of a “paradigm shift”. This itself was an indicator of “irrational exuberance” contaminating the analyst community at large. And for the most part, optimism fed on itself leading markets to unsustainable levels egged on by research reports.
This ultimately culminated in a correction that was quickly attributed to the above-mentioned “exogenous factors”.
The inflection points at the bottom of the cycle have been similarly met with a cacophony of reports that continue to highlight the scepticism that becomes deep-rooted once price reversals have taken place. To a point where the pessimism highlights the same macro factors as market headwinds and curtailing any price rise.
In a curious asymmetry of discourse, exogenous factors that were highlighted as reasons for the fall of markets — oil price declines, stock market corrections, earnings recession etc, — are not emphasised at all as the variables reverse.
So, if oil prices rise, the claim is that there is no correlation between oil and real estate. But if they fall, concerns abound about the impact on the economy. If transaction levels fall (as they started to do In the months before the 2008 and the 2014 correction), then the two are not correlated.
But if they rise, then they are.
The underlying factors of valuation in both instances indicated the onset of a recovery. In 2011, rental yields, money flows and supply side correction presaged a recovery by more than a year. In 2016, albeit at a lower run rate, the same has been witnessed in select communities.
In the meantime, events such as Brexit, the Trump election victory, and geopolitical factors have been highlighted, even though these events have barely had an impact in the economies that they occurred in. And financial as well as asset markets have shrugged these off.
Scepticism is a healthy part of analysis and forms the underpinning of any rational dialogue. In the case of financial markets, the only variable that supersedes it is fundamental analysis.
Eight decades of financial data show that financial markets rhyme throughout the ages, and in the long term, are always underpinned by fundamentals. Broadly speaking, any decline in markets that exceed 20 per cent sets the stage for a rebound.
Excesses in optimistic and pessimistic sentiments cluster around the tops and bottoms of market cycles. And almost every financial market cycle is a polar opposite to what the underlying fundamental indicators are.
Arguments put forth of a new paradigm shift at every top and every bottom of the cycle is the only claim that needs to be met with scepticism. They seldom are.
— The writer is managing director of Global Capital Partners

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