Real estate, alternative real assets and other diversions

GCC Focus – Dubai property market and the 2018 credit cycle Rents in prime Dubai locations like Downtown, Palm Jumeirah and Sheikh Zayed Road continue to fall in 2018

The Macro View

Saudi Arabia and Russia engineered a dramatic rise in the price of Brent crude via output cuts, the French far right National Front did not win the Élysée Palace in the Presidential election and the US Dollar Index fell almost 10% in 2017. I thought the three powerful macro forces would be largely positive for foreign investor interest in the Dubai property market and would suggest a bottom in rents and capital values. I was wrong. Rents in even prime Dubai locations like Downtown, Palm Jumeirah and Sheikh Zayed Road continue to fall in 2018, in some cases 20 – 25% below cycle highs. The office market continued to be pressured with a glut of vacant space with occupancy ratios in dozens of Business Bay buildings in the 55 – 60% range.

The industrial segment is in a bear market, with a 25% fall in Grade A Jebel Ali Free Zone warehouse rents and a 30% vacancy rate for prime industrial assets. Hotel revenue per available room continued its fall even as occupancy ratios remained high in five star Dubai hotels, a clear indication that average daily room rates are under pressure. Marriot no longer manage its Westin, St. Regis and W luxury brands for one of Dubai’s most prominent hospitality companies. The concept of “key money has disappeared in key retail areas like the Gold Souk, Textile Market, Deira (Al Ras, Nasser Square). The most prominent metric in the Dubai luxury home segment is the dramatic fall in sales prices for villas, townhouses and ritzy apartments. It did not surprise me that DAMAC Properties, listed on the DFM, reported its third successive quarterly loss and its Group CFO wants to reduce $500 million of its $1.5 billion commercial bank/capital market debt and slash its cost base.

There has been a visceral investor disappointment in the performance of offplan purchases. I have so many friends who waited three to four years for their luxury flat only to find out that prices were 30 – 40% lower, if their flat or villa could be sold at all. Rents are now falling faster than capital values, clear evidence metric of a glut in existing units, let alone development pipeline. There is absolutely nothing to suggest that there is an imminent bottom in rents and capital values. Property markets, like all asset markets based on leverage and credit cost/access are inherently cyclical. An investor who cannot analyze the credit cycles in Dubai can and will be fleeced by the offplan sharks mercilessly with armies of commissioned brokers motivated by even 7% payouts. Dubai Land Department’s decision to seize the assets of Schön Properties and reference to the Public Prosecutor and Dubai Courts is absolutely mission critical to restore lost investor confidence.

Offplan sales accounted for 58% of total sales in 2Q 2018 when there is such an alarming number of villas and apartments available in New Dubai for purchase. Even Emaar’s offplan sales binge has plunged. Investors have clearly turned bearish on capital appreciation and just accept yield, the reason there is so much interest in the secondary market in International City and even labour/staff accommodation in Jebel Ali with the allure of potential double digit gross yields.

It is now possible to accumulate units in JLT for as low as 700 AED per square foot in units owned by laid off owners. In my experience, in Florida and Spain, property bear markets during a protracted banking credit crunch, bottom at a 25 – 30% discount to replacement value. So I expect, say, JLT to bottom somewhere in the 500 – 550 AED per square foot range.

Catalysts for the property bear market since 2014? The oil price crash devastated GCC liquidity and investor flows. Putin’s invasion of Crimea meant the Russian rouble collapsed from 30 to 85 and is even now 68. Brexit gutted the British pound at a time when UK investors were a core feeder market for Dubai. Developers imposed unrealistic service fee hikes. The Value Added Tax (VAT) added to the woes of retail. Banks slashed corporate and SME loan books. India demonetized the rupee. Saudi Arabia front loaded fiscal austerity. The Qatar embargo hit a core Gulf investor and tourism segment. Tens of thousands expat executives have lost their jobs. Above all, borrowing costs have and will rise. 6 Month EIBOR is 2.8 now and will rise to 4% next year as the Fed embraces tight money. This means the EMI-rent spread bleeds cash for homeowners with floating rate mortgages.

Currencies – A contrarian strategy call on the Indian rupee 

My bearishness on the Indian rupee in successive columns has been vindicated with a vengeance in 2018. The Indian rupee has fallen to 70.90 as I write, even though the US dollar was soft last week on President Trump’s political/legal woes and signals from Fed Chairman Powell that he did not think the US economy was “overheating” at the Kansas City Fed’s Jackson Hole symposium. I had expected the rupee to fall to 70 by year end but the Turkish lira crisis and concerns about the BJP’s prospects in the general election, naked “welfare” handouts for the rural poor, the deterioration in the fiscal and current account deficit and exodus of offshore capital flows from Dalal Street amplified the angst on the rupee.

Narendra Modi, the same macroeconomic genius who sacked a world class monetary economist like Chicago’s Dr. Raghuram Rajan has now appointed RSS ideologue Gurumurthy to the board of the Reserve Bank of India (RBI). Frankly, Gurumurthy adds as much monetary policy finesse to the RBI board as Didi Rakhi Sawant or Sunny Leone, despite their other multiple talents. However, as a currency trader, I love my life in the second derivative, play three dimensional chess with the markets in real time. So paradoxically, I see a clear money making opportunity in rupee and position for my own passage to India via its long duration government bond market (G-Sec).

The Indian rupee is a buy at 71 for a 68 three month target because Planet Forex now prices in a September FOMC rate hike with near 100% probability but does not recognize that India’s inflation rate has now peaked. This means the Reserve Bank of India is on hold and the yield on the Indian benchmark ten year G-Sec could well fall 50 basis points to 7.40. I also believe Modi’s pre-election conversion to neo-Keynesian fiscal largesse (even Modicare!) means that he will defeat the Congress and its allies in the general election. RSS pracharaks on the board of India’s central bank mean the RBI will do nothing to offset Modi’s reelection odds with politically catastrophic interest rate hikes.

A swadeshi hostility to foreign investments, a joke privatisations like the IDBI deal, tariffs and Big Babu Raj define Modinomics 2.0. This is maximum government, minimum governance. No wonder the rupee has lost 10% of its value against the US dollar.

I expect a surge in expatriate remittances well above the $72 billion World Bank and BIS guesstimates. This is another reason to expect a short term pop in the rupee sometime in November or December. Crude oil prices could fall as the US shale rig count revs up and Saudi Arabia/Russia (OPEC is now ROPEC) increase output, I expect India’s inflation rate to have peaked for now. This means the RBI will do squat on the repo rate while the Modi bandwagon (yatra?) begins its second tryst with destiny. A BJP win will ignite a surge of foreign capital back into Dalal Street. Hence my recommendation to accumulate Indian G-Sec debt before the foreign fund managers realize that the fault, dear Brutus, lies not in the stars but in our refusal to discount the future while obsessively extrapolating the recent past. For me, neuro-reprogramming is as important as a grasp of monetary economics or Sangh Parivar politics when trading the Indian rupee.

The Macro View

About Matein Khalid

Matein Khalid

Matein Khalid is Chief Investment Officer of Asas Capital in the DIFC; he is responsible for global investment strategy and the development of the multi family office platform. He has worked in Wall Street money centre banks, securities firms and hedge funds in New York, London, Chicago and Geneva. In addition, he has been an advisor for royal investment offices in the Gulf for 8 years. Mr Khalid has four degrees in finance, economics, banking and international relations from the Wharton School, University of Pennsylvania. He is a director at the American College of Dubai and has taught MBA level courses in commercial/investment banking at the American University of Sharjah and British University of Dubai. He writes the Global Investing columns for Khaleej Times, Gulf Business and Oman Economic Review.

Articles by Matein Khalid

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