Liberalisation across the UAE gathers pace
Making sense of the latest trends in property and economics from around the globe.
5 minutes to read
Years of economic and social reforms helped propel Dubai into a regional wealth hub. Average house prices have risen sharply since the beginning of 2020 and, though growth is slowing, the city's evolution as a destination for the world's wealthy continues.
But while Dubai has dominated the headlines, Abu Dhabi - less than two hours drive away - has quietly been competing for a slice of the same clientele. It's doing a pretty good job: more than 5,000 special purpose vehicles (SPVs) now appear on Abu Dhabi's main companies register, compared to just 46 in 2016, according to data compiled by wealth advisory firm M/HQ for Bloomberg News.
Experts in the Bloomberg piece credit the UAE’s double tax treaty as a key lure for wealthy individuals seeking to minimise the tax bills of companies tucked inside these SPVs. The treaty, which spans agreements with dozens of countries including Hong Kong, India, Japan, Russia, Saudi Arabia and Singapore, eliminates double taxation on various types of financial gains. While the treaty is unquestionably important, increasingly liberal lifestyle elements are also playing a role - both Abu Dhabi and Dubai are considering opening casinos, for example. Abu Dhabi will open the region's first commercial brewery later this month.
The economic incentives are there, the lifestyle elements are coming together, but development of new homes is picking up relatively slowly. Just 33,700 homes are currently under construction and due to be delivered by the end of 2027, 59% of which are villas, according to Knight Frank's latest research. The price of the average villa remains about 16% below the 2014 peak, while villa values in Dubai are now 8% above the 2014 peak.
Interest rates
I've talked a lot in recent notes about a growing chasm between what central bankers say they are going to do, and what financial markets think they are going to do.
The view that inflation is beaten and interest rates will soon begin falling has taken hold across western financial markets. Central bank officials fear that financial conditions will loosen prematurely, whether by rate cuts or a shift in investor sentiment, paving the way for a resurgence of rising prices - history suggests we should give serious weight to this view, as this recent paper from the IMF shows.
This is important context for the Bank of England's latest decision on interest rates, due for publication this Thursday. A hold at 5.25% is priced in, but we should expect some pretty serious finger wagging from governor Andrew Bailey. Investors are expecting about 80 basis points of rate cuts during 2024, a view that Mr Bailey has repeatedly suggested is too dovish.
The CBI this morning published a set of projections more in-line with the governor's hints. It reckons the base rate will stay at 5.25 per cent for at least two more years - that's based on Bank of England projections showing inflation will not return to the 2% target until the third quarter of 2025.
Whoever turns out to be correct, it's looking increasingly like the UK Bank Rate will fall at a slower pace than key rates at either the Federal Reserve or the European Central Bank, which are expected to make respective cuts of 100 basis points and 130 basis points. That's fuelling gains in sterling. Goldman Sachs thinks the pound will hit $1.30 in six month, up from $1.25 today. Fidelity reckons it'll hit $1.40.
Asking prices
Average new asking prices for UK homes fell 1.9% this month as sellers grew more competitive, Rightmove reported this morning. Prices usually ease in December, but this month's drop was a little larger than the 1.5% average dip of the past 20 years.
The release follows publications of the Nationwide and Halifax indexes showing consecutive rises in house prices. As we've said previously, we still aren't sure whether these gains are part of a turnaround that will be sustained - trading is thin, which impacts the reliability of the indexes - but the housing market closes 2023 in a far more stable place than we assumed it would just a few months ago. Average asking prices closed this year just 1.1% below the same period last year, Rightmove said.
Mortgage rates have been easing since late July, which along with low supply has been the key factor stemming house price falls. Indeed, the increasingly benign outlook for interest rates has given many borrowers the clarity they need to come off the sidelines and make a decision, Hina Bhudia of Knight Frank Finance told City AM on Friday.
Rightmove also said it was seeing more "family movers" returning, "many of whom put their plans on hold due to the mini-Budget fall-out and uncertainty last year." Buyer demand in the mid-market, second-stepper sector is up the most against last year’s post-mini-Budget period at +9%, while overall buyer demand is up by 6%.
London hotels
Tourists are returning to the UK in greater numbers. Nationwide, 18.9 million people visited national museums in the first half of the year, up almost 40% compared to the same period in 2022, according to official figures. VisitBritain upgraded its 2023 inbound tourism forecast, with visits overall to the UK this year forecast to hit 37.5 million, 92% of 2019 levels.
The return of overseas visitors is driving a recovery in the hotel sector, according to the latest research from Philippa Goldstein. London’s 12-month occupancy to September 2023 increased by 16 percentage points to reach 77% - ahead of regional figures for the first time since the post-pandemic recovery began and is now back in line with historical trends.
The high inflationary environment has supported pricing, with London’s average daily rate (ADR) rising by 8% over the same period and is ahead of its 2019 performance by 22%.
In other news...
European mortgage market set for lowest growth in a decade (FT).