How do foreign buyers react to a strong US dollar?

dubai - The dollar movement has had minimal impact on buyers from Saudi Arabia

As the strength of the US dollar fluctuates over the years, buyers of real estate assets have responded to the move in different ways. Three major cities driven by foreign investment, New York, Singapore and Dubai reveal a dichotomy over the last 10 years. New York real estate prices have had a low positive correlation to the strengthening dollar, whereas Dubai and Singapore have a moderate inverse relationship.

Dubai has been a city driven by foreign money flows since the creation of freehold. Today, foreigners account for more than half of all real estate transactions across the emirate. As the greenback strengthens relative to other currencies, it's reasonable to imagine two things to transpire. First, foreign buyers could begin to look for cheaper Dubai homes. And second, more price-conscious buyers seeking more modest homes with may be left with fewer choices. Our research indicates that while both of those are happening to some level, not all foreign buyers have reacted in the same way to fluctuating exchange rates.

Pakistanis and Indian nationals account for a large portion of the foreign buyers and have responded similarly to a strong US dollar. The buyers from both nations seem to be sensitive to currency fluctuations. Contrary to the market wisdom, where the devaluation of the home currency leads to lower activity, in both these cases there have been the opposite response. Investors from the subcontinent look to hedge their investments from a devaluating currency, consequently moving them to dollar-denominated assets.

Over the last couple of years, investments from Pakistan have decreased in the backdrop of a stable rupee along with an asset boom in the local real estate and property market. However, recently the political instability coupled with the fears of a devaluation on the horizon has sparked a flight of capital back to Dubai. The International Monetary Fund has warned that the Pakistan rupee is overvalued by 15 to 20 per cent.

British buyers on the other hand also appear to be sensitive to currency exchanges, but in a more predictable way: as the pound devalued in the wake of 'Brexit', capital inflows reversed from Dubai to London as buyers tried to capitalise on the opportunities in London. However, the recent recovery of the sterling and over-dramatisation of the repercussions of Brexit will eventually cause a reversal of money flows into Dubai.

A case where the dollar movement has had minimal impact on buyers from a country is Saudi Arabia. They are largest buyers of Dubai real estate assets from the Arab countries, with investment flows quadrupling over the last five years. Saudi investments have had a non-existent correlation to the dollar index, and we opine that money flows from Saudi Arabia are poised to increase significantly in the coming year.

Despite having a short-term impact on transactions, there is limited evidence linking long-term currency movements to investment flows. Instead, what is seeming is that investment flows are determined by domestic as well as international fundamentals; in Dubai, as monetary flows from neighbouring countries (Saudi Arabia) attest, fundamentals against the backdrop of continued infrastructure spending appears robust. It is this that will underpin an expected increase in monetary flows in the years ahead.

However in the short term, given the relationship between property prices and the dollar strength, we can expect Dubai real estate prices to bounce back. Since 2016, the dollar index has corrected by 10 per cent, implying that Dubai assets have become cheaper for foreign buyers. In the start of the year, we have already witnessed an increase in transactional activity, especially in the off-plan space. In certain communities, this has been accompanied with a slight price rise as well. This is a trend that we expect to continue. Important to take cognizance of is that this is no longer a "one-way" market; fluctuations in prices will mimic a "random walk" before economic stimulus via construction projects kick in next year.
 
The writer is the head of IR and research at Global Capital Partners. Views expressed are his own and do not reflect the newspaper's policy.