Revaluation hopes another reason to invest in Abu Dhabi property

This represents another good reason for buying property in the UAE. For if you buy real estate in Abu Dhabi today you may find yourself receiving a one-off bonus in dollar terms in a future revaluation.

Indeed, it could be that the UAE has to undertake a series of currency realignments to more closely reflect the true value of its currency.

The problem is that most of the UAE's exports, i.e. oil and gas, are priced in US dollars, while the biggest share of imports comes from the euro zone. Therefore a falling US dollar causes inflation in the UAE, and in addition interest rates are lower than they should be to contain a booming oil economy.

Revaluation bonus

But there is a dilemma for real estate investors. Revaluation could provide a nice bonus on a property purchase as opposed to keeping money in a US dollar deposit account, but what if local interest rates begin to rise? Will that not be a negative factor for the local real estate market?

Of course, it all depends on how big the revaluation actually is, if it happens, and how far local interest rates are then raised. A small revaluation, which is all Standard Chartered Bank thinks is on the cards, would probably not impact on local interest rates.

Only if the UAE Central Bank was to drop the US dollar peg, as Kuwait has just done, and move to a basket of currencies would there be any possibility of higher interest rates.

Yet again real estate investors should be happy if this allowed the Central Bank to pursue a monetary policy more consistent with the long term interests of the economy. With local real estate prices currently low by world standards this might help to avoid a boom-to-bust housing cycle entirely.

Economic stability

International institutional investors would also welcome a shift to a monetary policy that permitted a stabilization of the UAE economy, rather than one that leaves it exposed to Hong Kong style ups and downs in real estate.

For the US dollar currency peg in Hong Kong was a primary factor in the 70 per cent contraction of real estate prices when the post-1997 handover bubble burst, as the fixed currency exchange rate meant that the full pain of asset deflation was taken in the real estate sector and not dampened by devaluation.

Therefore, any move to revalue the UAE dirham will probably be welcomed by the real estate sector as providing existing investors with a nice bonus in dollar valuations, and a sign that the country is moving to a more sustainable cycle of economic growth.