Inverse Link Between US Dollar and Oil Price Thwart Dubai Real Estate Market Recovery

Today, Phidar Advisory released its Dubai residential research note for the end of Q2 2016. The report shows that residential prices dropped in the first half of the year and projects further declines.

“Some claim this is a supply story, but supply has expanded slowly over the past thirty months,” said Jesse Downs, Managing Director of Phidar Advisory. “The current declines reflect soft demand,” she added.

In Q2 2016, apartment lease rates declined 2.2%, while sale prices declined 3.7%, pushing gross yields up to 7.9%, a three-month gain of 12 basis points, according to Phidar House Price Index: Dubai 9/5. Lease rates for Single Family Homes (SFH), also referred to as villas, decreased 3.6% and sale prices declined 1.1%, which pushed yields down to 4.7%, a loss of 12 basis point in the first half of the current quarter.

“The compression of villa yields is unsustainable and should slowly reverse in the coming year” said Ms. Downs. “Sale prices and rent declines for both villas and apartments will likely continue for the next 12 months, possibly up to 18 months,” she added.

In 2015, foreign nationals purchased over 80% of real estate investment in Dubai. From that portion, 82% was purchased from foreign nationals outside of the GCC, most of which are from countries with floating exchange rates.

In Q2, Phidar’s Dubai Real Estate Investment Demand Index REIDI remained flat, on the back of a strong, but stable, US Dollar. Since mid-2014 currency fluctuations created inflationary shocks for foreign buyers of Dubai real estate. Three currencies have a significant impact on Dubai property prices: Indian Rupee (INR), British Pound (GBP), and Pakistani Rupee (PKR). All three have strongly trended downward since 2008. (Phidar’s Dubai REIDI is not a measure of actual capital flows, but a real time indicator intended to assess the propensity for attracting capital inflows into Dubai real estate. It is a composite index of GDP and foreign currency z-scores for 22 countries, each country is weighted by an estimate of the total contribution to real estate investment demand.)

The United Kingdom’s referendum to leave the European Union, also called Brexit, on 23 June, caused the GBP to lose 11-12%. Since Brexit occurred in the last 10 days of Q2, the impact will be most noticeable in the Q3 REIDI results.

“The strong US dollar is one of the biggest barriers to a Dubai real estate recovery now. Unfortunately, a strong dollar also is usually associated with a low oil price, signifying a double hit to the market,” concluded Ms. Downs.