Will the Dubai Financial Market slump fund a second property boom?

Despite concerns about future oversupply, there is a good argument that suggests this may indeed happen. For stock markets and real estate markets are inextricably linked. But the link is not necessarily the one you might expect, i.e. stocks crash and housing follows.

Observers of the British property market back in the late 1980s had a classic demonstration of the stock market to real estate connection. In 1987 on Black Monday the UK stock market crashed, with billions wiped off the value of UK plc. And yet house prices continued to rise until 1990 (admittedly then slumping by around 40% in the worst post-war recession).

Strangely in 1987 the idea that those ruined in the stock market would rush to sell off property to clear debts simply did not happen. Instead people seemed to value their property more highly and held on to it.

A clear pattern

What appears to happen, and there are countless examples from around the world that demonstrate the same pattern, is that investment flows switch dramatically from shares to property in search of returns. No matter that a stock market crash surely portends a fairly serious business downturn that will also damage real estate - this is perhaps a little too subtle for the animal forces that move markets.

So now that we appear to be witnessing a serious correction in the Dubai Financial Market, with shares down 35% since their peak last November, will the smart money move into property and push prices higher?

In Abu Dhabi the rush to buy last weekend at the opening of sales at Aldar Properties high-rise towers suggests that this trend may already be evident. Are the thousands pursuing the newest off-plan buying opportunity investors who have just sold their UAE shares?

Maybe not, but they could well be the investors who might have bought UAE stocks if the market was still going up, and will buy apartments instead. The Abu Dhabi Securities Market, for the record, is 29% off its peak last May.

Abu Dhabi property

They may, of course, be joined by Dubai investors who think the Abu Dhabi property cycle will be similar to the one they have enjoyed in Dubai, and want to be in on the start of the next big thing. But what about Dubai property, will it benefit from the exit of funds from the local bourse?

The liquidity and investment model is surely the same as that seen in other similar situations in the past. There is also the fact that by global standards Dubai property is cheap both in terms of absolute price and expected rental yields.

And the UAE economy is also supported by high oil revenues and a new reforming cabinet has just been installed. So don't write the obituary of Dubai property just yet.