Will GCC investors move from shares to real estate?

Spotting an investment bubble is never really that difficult. All you have to do is look at a graph of price movements, and when the line turns almost vertical you know that this must be bubble territory.

Step forward the share charts of most GCC countries right now. A very clear price spike is sticking out a mile, and anyone can see that even an economy with fantastic prospects can not maintain exponential growth in share values. Conventional valuation yardsticks, such as price-to-earnings ratios, point to considerable over-valuation.

Now if GCC stock markets undergo a significant correction, there will still be huge liquidity in the region, but investors will be wary of stocks. Thus real estate is likely to be a beneficiary, and fortunately real estate prices do not look particularly high just yet.

For example, compare the cost per square foot in Dubai with a small town in southern England. You will find UK investors presently accept a rental yield about a half of that found in Dubai, and that house prices are double.

The degree of undervaluation is even greater if you try to draw a comparison with London prices, which is not so unfair given the value of tax-free expatriate salaries.

So from the standpoint of international benchmarks Dubai property is not overvalued at all. Therefore, once speculators have done with GCC stock markets we can expect them to turn their attention more exclusively to real estate. The implications for prices are obvious.

However, once these greedy people decide to pile into an asset class the inevitable boom and bust is also an unwritten part of the contract. For they operate on the investment principle of 'the greater fool' and hope to always pass on today what they bought the day before in anticipation of a greater and greater profit.

The trouble with speculators is that they don't know when to stop, and so the bidding of prices always goes too high, leading to a boom and then a bust.

Nonetheless, real estate always has a residual value, unlike shares for example, and so it is then a question of where prices land on the downswing. Given that Dubai property is at fair value at present - at least in terms of rental yield and affordability - then prices in a downturn will probably not be far from where they are now.

For the average investor that means that long-term house buying still makes sense, as you can afford to ride out a boom and bust cycle while still avoiding the payment of rent.