Why the oil price slump could hit UAE property

While the tumble in crude prices echoes a similar scenario almost 30 years ago, the UAE and wider GCC may find the effects more obvious this time round.

An aerial view of Dubai Creek from September 1987, after oil prices had collapsed. Greg English / AP Photo
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Top Gun was playing in the cinemas, Madonna was in the pop charts with Papa Don’t Preach and fashion was all about big perms and even bigger shoulder pads.

The year was 1986 and the big news was all about the economy where a collapse in oil prices eventually led to a consumer spending boom in the West.

Now, 29 years later, with the price of oil slumping 50 per cent in the past six months, the most since the 2008 financial crisis, experts are predicting a similar oil-fuelled property boom in non-oil producing countries – but a relative slowdown here.

Analysts say the oil slump is likely to hit house prices in Dubai, which had been already weakening due to the imposition of mortgage caps and a hike in property transaction fees.

According to JLL, villa prices in Dubai fell 1 per cent during the final three months of 2014 while apartment sales remained flat. Rents, too, for apartments and villas remained static during the final quarter of the year.

“The impact of the slump in global oil prices is likely to have a further impact on the real estate market in Dubai, largely through sentiment rather than through any actual decline in government spending,” says Craig Plumb, the head of research at JLL’s Dubai office.

“In Dubai a lot of buyers traditionally buy real estate using money that has come from oil funded economies such as the UAE, Saudi Arabia, Iran and Russia,” he adds. “So unlike in the West, the fact that oil prices have fallen and could perhaps provide consumers here with a little more disposable income is likely to have much less of an impact than everything else and we expect the overall effect on the housing market to be negative.”

Rashpal Heer, an associate director at DTZ, agrees. “The market is going through a period of correction and, whilst difficult to quantify the full extent, we expect the fall in oil price to further impact the property sales market in the short to medium term in the UAE, particularly Dubai, as domestic, regional and international investors from key oil dependent markets reign in investment,” he says. “We expect the residential market will be the greatest affected, in particular residential off-plan sales at recently launched or soon to be launched developments,” he adds. “The commercial and industrial sectors are likely to be the least impacted as market fundamentals are expected to remain good in the long term.

“The lower oil price will benefit the economies of non-oil producing countries such as India which, given that Indian nationals are big investors in Dubai real estate, may lead to higher levels of investment, and will be reflected in greater levels of tourism from these countries,” Mr Heer says.

Along with other economists he predicts that, if it is sustained, the global fall in oil prices could well fuel another property boom in the US, the United Kingdom, Europe and China and Japan.

“The economic consequences of falling oil prices are unequivocally good, for the economy and for real estate fundamentals of western countries,” he says.

“The majority of the boost to growth would come through stronger consumption but companies would also benefit from lower input costs. With a lag of 18 months or so we would expect to see higher rents than previously forecast across the board and particularly in retail. The residential sector will also receive a boost, as households gain the ability to service slightly higher mortgages.

In December, IMF economists predicted that if the fall in oil prices persists, then global economic activity this year could be boosted by up to 0.7 per cent in 2015 and up to 0.6 per cent next year with most growth predicted for the West as well as non-oil producing developing nations such as China and India.

However, in the GCC, where hydrocarbons represent more than 50 per cent of GDP and 80 to 90 per cent of government revenues, the outlook is less rosy.

At the start of January, Dubai unveiled a Dh41 billion budget, an increase of 9 per cent compared with last year. At the time the Government said the emirate was planning to maintain the size of its investments in infrastructure for the next five years despite the drop in oil prices.

Mr Heer says the fact that oil revenues will account for just 4 per cent of government revenue and the Government’s commitment to hosting Expo 2020 means few government cut backs are expected as a result of the slump.

“However, some developments may be scaled back as demand reduces and capital values are impacted,” he says.

“Over the next few years, with government spending in the GCC unlikely to be curbed, infrastructure construction activity should provide a strong basis for growth in the real estate sector,” says Khawar Khan, a research manager for Knight Frank Dubai. “In the near-term, weaker sentiment and its impact on the residential property sector is the principal downside risk. “Commercial property, however, should be able to shrug off such concerns as the region’s medium to long-term prospects remain strong.”

In fact CBRE predicts if the price of oil continues to drop for a sustained period then the huge GCC government-owned funds tasked with spending surplus cash on assets abroad may cut back on plans to buy European prime assets. “The biggest impact is potentially on the international property markets than the local markets,” says Nick Maclean, the managing director of CBRE’s Dubai office. “Because we see that the principal component of the surplus where oil is priced and production costs goes to the sovereign wealth funds in the region.

“And the sovereigns in the GCC are such an important component of new cash for the international markets that if that is withdrawn a little then it has an impact,” he adds. “Potentially if the price of oil falls ... for a prolonged period, they could stop buying so many buildings in London.

“It depends how long this level of pricing goes but the Kuwaitis and Adia [Abu Dhabi Investment Authority] have significant ambitions overseas at the moment.

“We’ve interviewed the sovereigns over the last six weeks or so. The key impact is going to be how much of that money is going to be spent overseas going forward and how much the local governments want to dip into their foreign currency reserves to reinforce what they are spending.”

GCC sovereign wealth funds have invested in some of the most headline-grabbing property purchases in London and the United States. Last month the Abu Dhabi Financial Group fund surprised local markets by shelling out £370 million (Dh2.13 billion) – £120m more than the asking price – for the 600,000 square feet New Scotland Yard police headquarters office block in Westminster, London.

And the Qatari Investment Authority is currently bidding with the US property company Brookfield to take full control of Songbird, the majority owner of the Canary Wharf estate in the London Docklands.

However, Mr Maclean says although GCC spending on trophy assets could decline, he believes total global spending on these assets will be maintained as investors from Asia-Pacific increase their appetite for overseas assets.

The top guns will still have plenty of firepower.

lbarnard@thenational.ae

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