UAE stock crashes refocus investors into local property

When AME Info suggested in late 2006 that a stock market crash would be good for UAE property prices many developers thought this complete madness.

But that is exactly what happened. Local investors avoided the stock market and instead put their money into property. They reasoned that the recent capital returns on property were attractive and rental yields in the emirates excellent.

Fast forward a little and the same opportunity presents itself to local investors today. Stick with a stock market that rallied too far and too soon, and is anyway being hit by global shifts in capital flows which have nothing to do with the fundamentally sound UAE economy, or choose real estate again.

Rate cut impact

It is a no-brainer really. The US Federal Reserve is bound to slash interest rates to try to put a bottom on a big downturn in Wall Street. And as UAE interest rates track US rates that will make home finance cheaper and support property prices.

At the same time the amount UAE depositors receive on their cash deposits in local banks as interest will fall. By comparison very high local rental yields will look most attractive, so they will feel inclined to buy property to rent out to replace the poor return on cash deposits.

Now actual completed property available for rent is in short supply in the emirates and in fact almost non-existent in Abu Dhabi.

Property shortage

Therefore, this renewed interest in buying property - because the stock market has tanked and other global investments look dangerous - will coincide with a shortage of available property. That can mean only one thing for local property prices. They will go up, and probably in quite a dramatic fashion.

Indeed, there will have to be a fall in rental yields towards lower interest rates - the market mechanism dictates it - and the way it is achieved will be through higher property prices. The alternative is for rents to fall, and that does not look likely does it?

In short, if you are thinking of buying a property in the emirates you should best get on with it now. Prices are going to be forced much higher by the impact of the falling local and global stock markets, lower interest rates and the absence of alternative investment opportunities.

You could argue that local investors will be scared by a second stock market plunge, and it is true that there will be some who lose everything. But the UAE is awash with liquidity which has to find a home, so to speak.

See also:
Is 2008 the year the markets crash?
Is the Middle East stock market rally over?
How the Wall Street gloom affects the Middle East