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Abu Dhabi, UAETuesday 19 June 2018

Using the catch-up theory for investment in global property

Method avoids the most highly priced markets that could well be at their highest in decades, such as Tokyo in 1990

There are still areas in Dubai and Abu Dhabi that could prove to be excellent property investments. Tasneem Alsultan/Bloomberg
There are still areas in Dubai and Abu Dhabi that could prove to be excellent property investments. Tasneem Alsultan/Bloomberg

"Location, location, location" or, in other words, buying the right property at the right time in the right place, is the general rule when investing in global real estate.

But another approach uses the "catch-up theory" as a guide as to what to buy, and for a long-term investment such as property it has many attractions.

What this theory says is that you should buy real estate in countries, cities or districts - or preferably all three - that have the most room to catch-up in price with major markets, and the wherewithal to make it happen; the bigger the gap to be traveled the bigger will be the eventual capital gain.

I first came across this idea in the early days of the Dubai real estate market for foreign ownership. To my thinking the gap in price between Dubai homes and comparable markets overseas was just ludicrously large.

Of course there were reasons for this: foreign ownership was only just established so it was a new market with no precedent to follow on prices; the actual law to permit foreigners to own was not in place; and the mortgage market was in its infancy with just one provider.

My enthusiasm was controversial at the time. One reader wanted to "rip out my throat" for giving this advice. He later became a friend and now regrets missing a lifetime opportunity.

And yet back then Dubai was already a wealthy city, if not as rich as it is today. People paid high rents so large mortgages were going to be affordable.

The same argument applied in Abu Dhabi a few years later when it opened up to foreign ownership, albeit leasehold and not freehold. And, in due course, prices doubled and trebled and came more into line with global levels for similar properties in cities of similar income levels.

But I would suggest that the "catch-up theory" can still be applied in the UAE in the right districts. Estate agents Knight Frank are tipping Palm Jumeirah for 2018 as one of five global super-prime markets likely to see the largest future price increases.

Why? Well, super-prime property prices here are still a fraction of levels seen in London and New York.

Plus, in the case of the Palm, there are billions of dollars being spent in upgrading its infrastructure: the new Nakheel Mall in its centre, the new 1.5km The Pointe boardwalk restaurant and retail destination, several additional five-star deluxe hotels, new towers and more super-prime shoreline apartments.

Will The Palm Jumeirah become Dubai’s answer to Nice’s Promenade des Anglais? If it does then property price increases in this district should easily exceed the Dubai average.

What I like about the catch-up theory is that it avoids the most highly-priced markets. These could well be at multi-decade highs, like Tokyo in 1990, and be set for a major fall, or simply doomed to stagnate.

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However, I would not be too gloomy about investment-grade property for wealthy investors around the globe. There is an established, multi-decade, global trend towards a larger and richer wealthy class, and that bodes particularly well for real estate at the upper end of the market.

That said you can’t really look in the window of an estate agents in London or New York without feeling that prices have to be at something of a peak, like assets classes such as stocks and bonds; and naturally there is a link between the three.

But while the UAE may still have a good deal of catching up to do before its house prices approach those of comparably wealthy cities around the world, there are markets that probably have an even bigger journey to make to catch up with their near neighbours.

One way to approach this is to consider average income in a country now and what it is expected to be in say 30 years’ time. House prices, very conveniently, tend to rise at double the rate of salary inflation, so get this right and you will be very happy.

In 2012 HSBC published a long-range study that forecast likely average incomes around the world by 2050. This can hardly be considered a definitive, or in anyway a fool-proof study, but it is probably the best available.

The report highlighted the considerable catch-up potential of economies in eastern and central Europe and parts of Asia.

By contrast average income in the UK, Germany and the US improved relatively little, to around $50,000 per head in year-2000 dollars.

The leap in Hungary was from only $6,200 last year to $32,000 by 2050, and in the Czech Republic from $7,200 to the same amount. So, theoretically, if you bought a property in Hungary then in 33 years’ time it would be worth 10-times what you paid for it today.

You might think that an absurd proposition. And yet the price advances in the former communist bloc have already been stellar. In St Petersburg, Russia in the 2000s apartment prices rose 10-fold in a decade, by no means an isolated example.

Now, it is true from a practical point of view that not every market in the world is investible. But new markets are being added from time-to-time, such as the UAE in the 2000s and eastern Europe in the 1990s, and these may still offer big catch-up potential.

Asia can also be interesting, although it does tend to be more of a local than global market. In Thailand, for instance, you cannot buy as a foreigner except in special zones like the Laguna Phuket that I looked around in January.

Then again Asian holiday resort properties could be an excellent buy long-term if their valuations play catch up with comparable tourism hot spots in the rest of the world, and the growth of Chinese and Indian tourist volumes is prodigious.

My reckoning on global property is that the ultra-low interest rates of the past decade have to a certain extent maxed out house prices in many leading markets. Be patient and prices could come down, representing a much better entry point.

But for the best investments those property markets with the most catch-up potential should offer much better returns.

Peter Cooper has been writing about Gulf finance for two decades.