Why monetary union is good for Abu Dhabi real estate

Real estate investment is generally a long-term activity, with the exception of short-term flipping which generally ends in disaster for those involved.

Thus a time-horizon of 10, 15 or even 25 years is normal when investing in property. You simply trust that in the long-run property will at least match inflation in capital gain, and that rental yields will average out at a performance above competing asset classes.

Therefore any significant economic change that makes that investment more secure is to be welcomed. And any economic reform that improves economic fundamentals is likely to increase real estate capital values and probably rental returns.

Monetary union

Step forward the new GCC Central Bank which Abu Dhabi this week repeated its offer to host, and the GCC monetary union projected for 2010.

At first sight GCC monetary union might be seen as a negative for real estate, as in all probability an independent regional central bank would set higher interest rates than those dictated at present by the peg to the US dollar.

However, a gain in real estate capital value does not have to come just from rising prices. An upward revision of currency value will also just do just as nicely.

Consider the European Union since the introduction of the euro and the 40% upward revaluation against the US dollar. In US dollar terms EU property is worth 40% more than it was before the currency union.

The oil-backed economies of the GCC will probably carry a similar premium in the future for their single currency. It is one reason why the GCC monetary authorities are keen to move away from the US dollar peg over the medium term.

Single currency bonus

Buy real estate now in Abu Dhabi and you buy effectively in US dollars but have the possible added bonus of a conversion of the local currency into something stronger later on. Certainly if the GCC Central Bank was to follow the example of Singapore in its highly successful management of its currency, this would be the impact.

Finally, of course the physical location of the actual GCC Central Bank would be a coup for Abu Dhabi in terms of attracting business and particularly finance to the UAE capital. But this would most likely be a side issue in comparison to the impact of the monetary union itself on real estate capital values, at least in US dollar terms.