Capital and Clarity lead to Confidence

Like the proverbial race between the turtle and the hare, global economics, by its very nature, has become a machine on a constant race against time and tide.

Mid-January 2016, RBS gave a rather bleak projection of the immediate economic future by advising everyone to “sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” Though not everybody went into panic mode, a lot of industry stakeholders did reach for that panic button while hoping against hope that the worst is over.

Now again, late last week, there was news that the global stock markets fared a little better after a slight rebound in oil prices, and the promise of interest rate cuts from the European Central Bank (ECB). The US, European and Asian markets all performed positively amid assurances of more support for the economy – which, by all appearances, must refer to the global economy – whose performance has become the bedrock of most (if not all) of our business and investment decisions.

And while we may want to separate ourselves from the global economy and assert our ability to make independent decisions based on prevailing local conditions, we are unable to do so – thanks to the phenomenon of globalization. We, as nations, are now interlinked through a series of socio-economic and geopolitical relationships from whose web we have become inevitably intertwined.

But in order to not get too caught up in what appear to be lukewarm financial prospects, and to avoid making hasty, ill-advised investment decisions, it is always useful to master the fundamentals.

In real estate, the three essential ingredients considered prerequisites for the property market to function effectively remain to be the 3Cs: CAPITAL, CONFIDENCE and CLARITY. For investors, potential owner-occupiers, developers or another industry stakeholder, these ingredients are of paramount importance in ensuring long-term profitable and sustainable growth in an industry which, in itself, is a key ingredient to long-term economic growth.

The 3Cs are interdependent whereby a shift or change in any one element will affect the other two. The relationship between all 3Cs can be either positive or negative, and can lead to a multiplier effect on growth, or can increase the rates of contraction or decline.

The amount of CAPITAL injected into Dubai real estate in 2015 amounted to AED 135 billion which, last year’s market slowdown notwithstanding, exceeded the AED 109 billion total invested in the year 2014. The exceptional performance of Dubai real estate even in the midst of global and regional economic challenges, and its ability to attract a variety of investors worldwide are strong indicators of the CONFIDENCE investors have in the quality and performance of Dubai property.

When you are investing in real estate, you are really investing into an economy, and you must have confidence in its future. The UAE economy in general, and the Dubai economy in particular, are both faring quite well as the promotion of a more diversified economy has softened the impact of last year’s falling oil prices. Economic growth in the UAE is projected at a modest 2.6 percent by IMF, with the economy being driven by fundamentals such as tourism and trade and a slew of new projects to grow these important revenue-generating economic segments.

Upcoming initiatives such as the 2020 Expo are also important in building confidence in the emirate. The effect of the 2020 Expo on the UAE economy cannot be underrated in terms of generating demand for real estate assets. Hosting the World Expo will provide additional impetus for the industry to enjoy continued growth, and the predictable surge in demand for accommodation and commercial space of all types, from labor camps to offices to warehouses to apartments to executive villas, is sure to have a significant effect on property values.

The last ingredient, CLARITY or transparency, is arguably the most important. Investor confidence in and the level of understanding of their legal rights, the consistency in the application of the law, government economic and social policy along with knowledge of developers track record in terms of quality, integrity and proficiency can be boosted by a proactive drive for clarity.

Lawmakers have been working hard in Dubai to address the issues of CLARITY and CONFIDENCE in particular. Steps have been taken to introduce laws that better protect investor rights and standardize and clarify the relationship between developers and investors. The law is aimed at protecting investors in a variety of areas, from delays in the handing over of projects, changes specifications of properties, defects and any material departure from the contracts provisions.

These steps towards increased CLARITY, showing clear intent by the regulating authorities to develop a more sustainable and consistently profitable industry model, have been essential in driving renewed CONFIDENCE in the industry resulting in massive injections of creditors’ and investors’ CAPITAL into Dubai real estate.

So now, armed with the knowledge that several factors come into play in our business and financial lives, especially as property investors, we can now take better heed of what global economics is telling us and what we know to be, where we are, and then make sound investment decisions without having to reach for that panic button.