With the annual property show CityScape Abu Dhabi wrapping up this week, let us say $500 billion question is whether UAE real estate could one day be as valuable as in Singapore, Central London or Mumbai?
It is worth considering what factors have lead to the very high commercial and residential property prices in such cities. They were not always so highly prized. The revaluation came in waves over a period of time. There was often a big boom and bust as a part of the process, one that left skeptics doubting the possibility of recovery.
Tipping factors
However, the first factor favoring higher prices is a favorable geographic location for trade and business. Then you need a legal framework that allows the secure ownership of property. And finally an influx of wealth either from domestic or foreign investors, preferably leveraged by a large banking sector that likes to lend against property.
Take Singapore for example. Its position as a trading hub allowed it to develop into a leading business city under very wise leadership. Property ownership rights were clearly established. This did not prevent a huge boom and bust in the late 1980s, now largely air-brushed from local history.
Then came waves of speculative investment by both local and foreign investors that first allowed prices to recover and then rise in wave after wave to global hub city property levels. Banks lent heavily against property. Could this be happening now in the UAE?
People immediately turn around and say well look at Abu Dhabi or Dubai, they are not London or Paris? Where are the parks and museums, shops and restaurants? Well the museums are under contract, the parks available and have you visited the new mega-malls and world-class restaurants in the five-star hotels?
Then again how many museums are there in Singapore or Mumbai? And that does not stop real estate prices being high. ArabianMoney is more struck by the economic parallels between the UAE and the other countries with more highly priced real estate.
The domestic wealth of the UAE is surely not in question. Per capita GDP is the fifth highest in the world, and that includes the expatriates, exclude them and wealth is off the scale. There is a tenth of the world’s oil reserves and the world’s largest sovereign wealth fund. The UAE is the trading hub of the Middle East and a growing financial centre.
Property laws have only been established relatively recently but they have quickly evolved into a model modern system, however unfairly many off-plan buyers in the recent boom and bust feel that they have been treated. But there has been a huge real estate crash in the recent past with prices smashed by as much as 60 percent.
Liquidity flood
Now we are starting to see the new money come into UAE property. Record high oil revenues have brought domestic liquidity back. The Arab Spring has boosted spending by regional governments and thus trade activity through the UAE. It has also diverted high spending tourists into the emirates. But most importantly for property the Arab Spring is a major source of new overseas investment. Foreigners are arriving with suitcases of money to invest in property. And it is not just a passing phase, more and more continue to invest in the UAE as a regional safe haven both for personal and commercial reasons.
Did not the oil price boom of the late 1970s give property prices in Central London a lift into the stratosphere with buying from the Middle East from which it has never fallen? Did India’s incredible GDP growth rates of recent years not push up prices in Mumbai to amazing levels for a country that still has severe poverty? Did the Asian economic miracle not bring Singapore property back from its 1980s’ crash?
All the factors required to create a far more valuable real estate sector are in place in the UAE. How long will it take to get there? Many observers could be in for a surprise.
