Unitas Consultancy (A GLOBAL CAPITAL PARTNERS GROUP COMPANY) Q1 2016 This document is provided by Unitas Consultancy solely for the use by its clients. No part of it may be circulated, quoted, or reproduced for distribuOon outside the organizaOon without prior wriSen approval. STRICTLY CONFIDENTIAL Office No. 103, The Palladium, Plot No. C3, Jumeriah Lake Towers, Dubai, UAE Building Cycles: Growth and (In)stability
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This document is provided by Unitas Consultancy solely for the use by its clients. No part of itmay be circulated,quoted,orreproducedfordistribuOonoutsidetheorganizaOonwithoutpriorwriSenapproval.
to a flurry of new developments flooding the villa segment in the second construcOon wave creaOng an over-supply,consequentlyleadingtothevillasegmentunderperformingapartmentsby15%inthiscycle.
• Aparadigmshi^thathasoccurredduringthetwocycleshasbeentheshortageofaffordablehomes.AsDubai’spopulaOonconOnuestogrowbetween5-7%withthemiddle-classcomparingofthebulkofthepopulaOon,theneedforaffordablehomeshas been reflected in the second price cycle. Mid-income housing communiOes such as InternaOonal City and DiscoveryGardenshavefallenbyhalftothatofprimecommuniOessuchasDubaiMarinaandJumeirahIslandsinthethirdandfourthphaseofthepricecycle.
RealestatecyclescanbecategorizedintofourdisOncOvephases;(i)recovery,(ii)expansion,(iii)hypersupplyand(iv)recession.Thesephasesaredefinedby twostagesofup trends,whendemandoutstrips supplypushingpricesonanupwardtrajectory,andtwostagesofdowntrends,whensupplyoutstripsdemandcausingprices to fall.Whilst it isasourceofperpetualdebateas towhich stageof thecycleaanymarket isat, it appearsas ifDubai is currently in itssecondcycleinphase4aspricesconOnuetotaperdownwards.
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Index
8yearCycle
6yearCycle
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8years 8years
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TheOmeperiodsofrealestatecyclescanrangefrom4yearsto12years,usuallywithanaverageof8years.Theabovechartdepicts the scenarios that could occur in Dubai given different cycle lengths. In a six-year cycle we can expect prices toreboundinthethird-quarterof2016,asthemarketenterstherecoveryphaseof itsthird-cycle.However, ina longertermscenariowecanseeareboundin2018,orevenaslateas2020.Although,pricecycletheorycanbeaindicaOonofarebound,thelengthofthecyclesaregovernedbyfundamentalsofsupplydemandmetrics,capitalflowsandjobcreaOon.
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ThroughtheLookingGlass…8years 6years
IncepOonoffreehold
GlobalFinancialCrisisInflecOonPoint
DubaiWinsWorldExpo2020
OilPriceCrashBegins
WorldExpo2020
InflecOonPoint
Giventhefactthatconcernsof“hyper-supply”havebeenabated,andthatsupplyisalreadydraggingfarbelowesOmatelevels(refertoourpresentaOonthe“TautologyofSupply–2015Q4”)andthefactthattransacOonlevelshasalreadystarted towitness an increase in certain communiOes (refer to our presentaOon “Follow theMoney – 2015Q4“), itappearsasifDubai’srealestateisfollowinga6yearlifecycle,implyingthattherewillbeaninflecOonpointsomeOmein2016,asfiscalpolicysOmulatesenduserdemandonthebackofconOnuedjobcreaOon.
AOme series analysis of the peaks and troughs of thefirstDubai real estate cycle shows that the villa segment hadappreciatedmorethantwicetothatoffapartments.Thisshortageofvillascanexplaintherushofdevelopersintothissegmentinthesecondcycle,leadingtoanoversupplyhighlightedinourpreviousreport,“Dubai:AcloserLookinto2013(Q1 2014)”. The oversupply became apparent on a relaOve basis as the apartment segment witnessed higherappreciaOonratestothatofvillasinthesecondpricecycle.
A comparison between the current and previous real estate cycles reveals that in the last downturn themid-income housing segmentincurredthe largestpricedrop.However, inthesecondcycleaparadigmshi^occurred,duetoashorrallofaffordablehousingandoversupplyofhigh-endunits,themid-incomesegmenthasbeenthemostresilientinthedownturn.
The above chart highlights the correlaOon between the US Dollar and real estate markets. As the table highlights,Dubai’srealestatemarketsappeartohavebeenimpactedthemostwiththeriseoftheUSD(thiswasreferredtoearlierinourpresentaOon“TheCuriousCaseofPaymentPlans”).Thisisnaturalgiventhefactthatnondollarcurrencyinflowsintotherealestatemarketcountedfornearlyhalfoftotalinvestmentsmadeinthelastthreeyears.TheresurgenceoftheUSDhasledtoataperingoffofforeigninflowsconsequentlyleadingtopricedeclines.
Real estate price cycles havef o u r d i s 3 n c3 v e p ha s e s(i) recovery, (ii) expansion, (iii)hypersupplyand(iv)recession
The3meperiodsof realestatecycles can range from 4 yearsto 12 years, usually with anaverageof8years
Although price cycle theory may given anindicaOon of market peaks and trough, theunderlyingengineisbasedonfundamentalsintheform of supply/demand, business acOviOes, andcapitalflows.Ina6yearcycle,weexpectarecoveryinlate2016,andpricespeakingby2019/2020 intherun-uptotheWorldExpo2020.Given these dynamics,we opine that the currentdiscounts available in the market are aSracOveprice points for bargain hunters to capitalize onthebullruninthefuture.
Giventhesupplyanddemandmetricsatplayweopine that Dubai is currently in the recessionphaseofitssecondrealestatecycle.AssupplyconOnuestolagandpricefallsstarttotaper, Dubai could be entering the recoveryphaseofitsthirdcycleinlate2016.However,inalonger term scenario we can see a rebound in2018,orevenaslateas2020.Apriceanalysisofoff-planprojectsversus readyproperOesfromtheirlaunchOlltheircompleOon,revealsthatbothappreciateatsimilarlevels.
In the first asset boom, villas had superior pricegrowthsbyafactorof2relaOvetoapartments.Thiscaused an oversupply of villas in the secondconstrucOonwave as developers tried to capitalizeonthegrowingdemand.Duetothelopsidednessofsupplyanddemand,apartmentsexperiencedhighergrowthratesinthesecondcycle.Asimilardynamictranspiredbetweentheaffordablehousing segment and prime properOes. Anoversupply in the first second cycle of primeproperOes and a shortage in affordable homes,caused a reversal of roles for price appreciaOon inthesegments.
Dubai has a moderately high inverse correlaOonbetween real estate prices and the US dollarstrength. When looked across a variety of ciOes,Dubai has the highest, for example, it is twice tothatofSingapore.This is natural given the fact that non dollarcurrency inflows into the real estate marketcounted fornearlyhalfof total investmentsmadeinthelastthreeyearsTheresurgenceoftheUSDhasledtoataperingoffof foreign inflows consequently leading to pricedeclines.
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