Especially in a desert.
The rally in Dubai luxury villas has been as swift as it has been spectacular since the autumn of 2020, with anecdotal evidence of 50 to 70% cumulative price rises. Constructed villas were a mere 20% of the Dubai housing stock after the protracted six-year bear market that saw prices plunge by 40 to 50% since their 2014 peak, obviously creating assets that were available far below their replacement cost and with stellar rental yields, even though the local market was illiquid and many developer balance sheets were not exactly hunky dory – au contraire.
Yet the pandemic led to a spike in demand for luxury villas from HNW families desperate to take advantage of Dubai’s golden visa, public health protocols, digital/sunrise industries and traditional status as a geopolitical safe haven, known to its feeder markets since the Iranian revolution/Lebanese civil war/Zia coup in Pakistan in the 1970s, the collapse of the USSR and corrupt ANC rule in South Africa in the 1990s and Arab Spring inflows in 2011-2012.
In the past, King Dollar had an inverse correlation with crude oil prices and a property slump in Dubai, as we learned the hard way in 1998-99 and 2008-10. This has not been the case in this cycle. Brent was $35 in September 2020 as the bear market in the Dubai property bottomed and is $95 now, albeit 30% below its post Ukraine invasion peak. King Dollar is up 17% against its euro/sterling/yen weighted index (DXY) but 40 to 80% up against the currencies of EM nations that constitute the traditional feeder market for Dubai.
“To buy tangible assets in the ultimate hard currency (USD) in a nation where the government has a cosmopolitan, tolerant and futuristic DNA makes perfect sense”
The PKR has lost 50% of its value in the last four years alone and I am not surprised that 50,000 of my compatriots own property in the UAE as an FX hedge. The motivation for Brits, EU citizens, Ukrainians, Afghans, Africans from Cairo to Cape Town, Indians, etc, to buy tangible assets in the ultimate hard currency (USD) in a nation where the government has a cosmopolitan, tolerant and futuristic DNA makes perfect sense.
Yet supply always spikes higher to meet demand in Dubai. It is scary that so many friends want to develop golf course-view villas at inflated prices when such villas were empty in ghost cities two years ago. It is also no coincidence that almost 50% of all transactions in the past year were speculative off-plan deals that proved so lethal to investors a decade ago. Yet bull markets/greed makes investors blind and there are none so blind as speculators who refuse to see.
Now that average sale prices in Palm Jumeirah are near 3800 AED per sq ft, can you honestly say you are buying assets below replacement cost, as I routinely find them in global REITs in both New York/Asia? The greater fool theory is essential if you are a property broker, as I hear that some have made 10 to 30 million AED in the past two years with zero personal risk and it is not uncommon to see Ponzi syndicates of brokers ripping off foreign buyers with up to 20 to 30% mark-ups. This is a cycle peak and smart money should never skate on thin ice.
