Sunday, February 19, 2017

Currency fluctuation hits Dubai property market

An analysis of major cities that rely on foreign inflows for real estate purchases have shown mixed trends on the fluctuation of the dollar, said a report by property experts.

An analysis of property prices over the last 10 years in the major cities driven by foreign investment - New York, Singapore, and Dubai  - reveals a dichotomy when measured against changes in the US Dollar,

There is a moderately strong inverse correlation between money flows in the Dubai real estate market and the US dollar, according to a report compiled by Reidin, a leading real estate information company focusing on emerging markets and Unitas Consultancy.

The three major foreign buyers in the Dubai real estate market are Indians, British, and Pakistanis. Indian and Pakistani investment flows have a direct correlation with the devaluations of their currencies.

As the currency devalues, capital flows increase to Dubai, as investors look to hedge their investments.

However, in the UK the opposite trend transpires. As the sterling devalued, more investors retreated back to purchasing property in London in order to capitalize on the weak sterling, stated the report.

"With an appreciating dollar since 2011, transactions (and investment flows) have been impacted adversely as property values have become more expensive in local currency terms, even though we witness that in 2016, transactions have stabilized and even increased slightly in the latter half of 2016," it added.

An analysis of property prices over the last 10 years in three major cities driven by foreign investment, New York, Singapore, and Dubai reveals a dichotomy when measured against changes in the US Dollar, said the Reidin report.

New York real estate prices have had a low positive correlation of 0.1 to the strengthening dollar, whereas Singapore and Dubai have a moderate inverse correlation of (-0.33) and (-0.28).

An analysis of British buyers of Dubai assets against the USD:GBP reveals an opposite trend to that of India and Pakistan. As the GBP gets weaker, capital flows in Dubai begin to decrease as investors take advantage of the weak sterling in order to purchase assets in London and Great Britain.

On India, the property expert said it has a high positive correlation between investment flows and the movements in the USD:INR. The recent demonetisation of the Indian rupee has added to the fall in foreign investments of purchasing Dubai real estate assets in H2 2016.

A stable rupee has actually led to a moderation of inflows, and the correlation implies that as the rupee depreciates, money flows actually increase.

Correlations are used as a statistical tool to show how strongly two variables are linked. Although, correlations are useful to determine relationships, they should be scrutinized.

Correlations between Dubai prices and the dollar index change significantly depending on the interval of measurement. When measured on a quarterly basis there is moderately strong inverse correlation of -0.28, however when measured yearly, the correlation switches to a moderately positive correlation of +0.26, stated the report.

This shows that overall monetary flows over time are actually positively correlated to a strengthening USD, indicating that underlying fundamentals are the major cause for investment decision making rather than currency movements.

According to the report, the Indian investment in Dubai real estate assets has a lower positive correlation to that off Pakistan.

Even here, as the currency devalues investors begin to invest in dollar denominated assets to hedge against currency fluctuation, it stated.

The recent demonetisation of certain Indian rupee notes also halted the economy, and therefore investment flows into the domestic real estate market; however as domestic policies manifest themselves into currency movements, inflows may actually resume heir upward incline as the Rupee depreciates, the report added.

Reidin pointed out that the UK capital flows into the Dubai real estate assets have an inverse correlation to the GBP:USD. Unlike Pakistan and India, as the currency devalues, capital flows decrease. The recent devaluation of the Sterling along with ‘Brexit’ has created an opportunity in London for investors to capitalise on.

In the Arab region, Saudi Arabia is the largest buyer of Dubai real estate assets with investment flows growing four-fold by the second half of 2016 compared to the same period in 2012, despite the strengthening dollar and crash in oil prices.

A correlation between Saudi investments and the dollar index is neutral, whereas to oil prices it has low positive correlation of 0.14. With the rebound in oil prices we can expect Saudi buying in the market to increase, stated the report.

Interestingly, Saudi investments have non-existent correlation to the Dollar index, and a low correlation to oil prices.

"As far as Saudi investors are concerned, currency movements have had little impact on purchasing decisions, and we opine that money flows from Saudi are poised to increase significantly in the coming year," it added.-TradeArabia News Service

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