Mixed impact on real estate and tourism

With our currency pegged to the US dollar, which has been declining in recent months, it could very well lead us to believe that we might see a recovery in the real estate market and tourism if it continues that way. After all, investors and tourists from Europe, Asia, Australia and South Africa currently have improving purchasing power in dollar terms, and, therefore, relative to the UAE dirham.

In terms of the potential impact on these two sectors that are considered to be among significant drivers of the economy, it's going to be a mixed picture, both now and going forward, according to economists and sector experts. It's not just the currency movement that determines whether sectors will gain or not from it. Several factors local and international, play a role.

Ending October, in the past 12 months, the US dollar was down 18 per cent against the euro in fact it fell to a 15-month low this past Wednesday 40 per cent down against the Australian dollar and South African rand.

While all agree that a shrinking dollar will positively impact on the number of visitors, overseas investors' interest in residential and commercial real estate, particularly in Dubai, will supposedly continue to be lukewarm.

"One area to benefit from the weaker US dollar is tourism, especially from the euro zone area," said Monica Malik, chief economist at EFG-Hermes, the largest investment bank in the Middle East.

"Given the dirham's peg to the dollar, any dollar weakness will boost price competitiveness."

If that translates into reality, there will be an uptick in numbers arriving, and that would mean higher hotel room occupancy and increased footfall and perhaps actual buying in stores.

"A weakening dollar may assist the retail and hotel sectors of the market — as visitors from Europe will find their euros going further," said Blair Hagkull, managing director of Jones Lang LaSalle MENA.

But that's the only segment in real estate, particularly in Dubai, according to Hagkull that is going to benefit from a stronger euro.

"I would expect the decline in the value of the dollar to have little impact on sale prices for residential or office space in Dubai as these are determined more by dynamics in the local market," said Hagkull. "With concerns over the high level of current and future supply, investors are more likely to be focused on the strength of end-user demand than they are on currency fluctuations."

Malik of EFG-Hermes adds: "External investor interest at the retail level will remain relatively muted, although there has been some interest by foreign funds and larger investors looking to pick up distressed assets. Given the oversupply in the sector amongst other factors, expectations of price increases are likely to remain limited."

According to a currency strategist it will take more than just a mere fall in the value of the US dollar to perk up investor interest in the real estate sector.

"It is important for the US dollar fall to generate investor interest in what in dollar terms may seem like a good value or under-valued assets over a medium term horizon," says Jason Goff, deputy general manager and head of treasury sales at Emirates NBD.

But going forward, he is more hopeful.

"It's not going to be a party tomorrow, but for me that is yesterday's news. [The market] is cheap now, and Dubai/UAE has oil, business, trade and a great regional location. In my own opinion, the bottom is here already, and prices will start to move next year."

Article by: Gurav Ghose - http://gulfnews.com