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Real Estate: The “Traditional” Alternative

Date : 14/10/2018
Author:  Bassam N. Al-Othman

                               RE-Blog.jpg

In the past, real estate was considered the primary investment of choice. However, over the last few decades, stocks and bonds have become the main constituent of an investment portfolio. Currently, real estate is one of the major asset classes within the alternative investment world.

Financial vs. Real Assets
The main difference between financial assets (stocks and bonds) and real assets (real estate) is that the latter represents actual rights to consumption rather than indirect financial claims generated by the assets of the firm.

Main characteristic of real estate investments
The real estate market operates in cycles that vary between 5-7 years.
The cycle provides health to the overall industry by providing a natural hedge against potential bubbles. In general, the cycles are more evident within mature markets.
   

                             

In addition, real estate is considered an operationally intensive asset requiring specific managerial expertise, unique know-how, and ongoing oversight.

Asset Allocation Methods
As with other asset classes, asset allocation within the real estate industry can be achieved either through a top down or bottom up approach. The top-down approach is to take a big picture view of the different real estate categories, whereas the attractiveness of the individual assets drives the bottom up approach; however, the most common method is using a hybrid approach, combining drivers of both procedures to reach the optimal investment decision.

Direct vs. Indirect Real Estate
An investor can gain exposure to the real estate sector through various vehicles. A very straightforward method to categorize these vehicles are whether they are direct or indirect. As per the “National Association of the Real Estate Investment Trusts”, a direct investor invests in the asset itself, whereas an indirect investor invests in the expertise of people managing his money. The below sections are written from the perspective of a direct investor.
 
Benefits and Drawbacks
The main advantages to real estate investing include but are not limited to:
  • Potential hedge against unexpected inflation
  • Diversification benefits with other investment classes
  • Absolute return investments
  • Generate cash inflows through rentals
The main drawbacks to real estate investing include but are not limited to:
  • Heterogeneous characteristics make due diligence difficult
  • Inability to divide investment into the desired size (Lumpiness)
  • Illiquidity due to high unit cost and transaction size
  • Overstated risk adjusted return as the data is smoothed since real estate values are based on appraisals
Investment Styles
Core, value, and opportunistic are three very common style categories used to describe real estate investments. Established by the “National Council of Real Estate Investment Fiduciaries” these styles classify investments by volatility.

Core – Debt like instruments characterized by low volatility and leverage. Income generated from rentals rather than capital appreciation represents most of the returns.

Value add – Moderate volatility and leverage with most returns generated from capital appreciation rather than income generation. These investments include semi leased core properties and properties undergoing renovation or repositioning.

Opportunistic – Equity like instruments characterized by high volatility and leverage. Capital appreciation represents almost of the returns from this style. These investments include developing raw land and redeveloping properties that are in poor condition.
 

Tags:  Estate, Real

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How Inflationary is VAT in the GCC?

Date : 25/03/2018
Author:  Marmore MENA Intelligence




The residents of Saudi Arabia and the UAE, who had long enjoyed a tax-free existence, were finally subject to a Value Added Tax of 5% on goods and services, from Jan 1st 2018. The introduction of VAT, which is seen as one of the biggest policy shifts in recent times across the region, is expected to bring in additional revenue to the respective governments. VAT being a consumption based tax, will have implications on customer spending as well as inflation. As of 2018, Saudi Arabia and UAE are the only GCC countries to implement VAT, with the others aiming to follow suit in 2019.
 
Considering that interest rates and economic growth have a bigger influence on inflation, there is little doubt that the short-term effects of VAT on prices, will pose challenges to both consumers and businesses. The additional expenses incurred due to the addition of VAT are likely to have a bigger impact on high value purchases than day-to-day expenditures.

After the inception of VAT, both Saudi Arabia and the UAE witnessed a sharp rise in inflation for the month of January 2018. Annual inflation for January 2018 spiked to 3.0% and 4.7% for Saudi Arabia and the UAE respectively. Compared to the prices of December 2017 significant changes were seen in prices of Clothing & Footwear, Restaurants & Hotels, Transport and Tobacco. Notably, the annual inflation on tobacco products was more than 50%. However, this was due to the implementation of a 100% sin tax in both countries for tobacco products. Inflation on transport was also higher owing to the subsidy cuts in fuel.

Taking the case of UAE, the effect on inflation in January 2018 could’ve been worse if not for the weak real estate market which resulted in a decline of residential rents. Lower rents therefore helped offset some of the inflation effect as housing and utilities form a significant chunk of the price basket. For Saudi Arabia, the change in base year for consumer price calculation from 2008 to 2013, helped bring down its inflation figures.

Change in Consumer Price Index – Jan 2018




Source: SAMA Monthly Statistics, Federal Competitiveness and Statistics authority, Marmore Research

In the UAE, housing, healthcare and education costs did not see a major change as they were exempted from VAT. Despite public transport and air travel not falling under the purview of VAT, transport costs rose by 4% in Jan 2018 compared to the previous month due to the taxation on fuel. The case was similar in Saudi Arabia where housing and education were not affected. Cost of apparels including clothing and footwear fell by 2.3% between Dec ’17 and Jan ’18 despite being taxed, as they were being heavily discounted due to the slump in sales.

While the introduction of VAT has effected a push up in inflation for January, its impact is expected to fade over time. Japan, which increased its VAT from 5% to 8% during April 2014, witnessed an immediate impact on its inflation rates which surged to 3.7% in May 2014. However, the rates eased off to 0.5% after 12 months. Evidences from other global cases also suggest likewise.

Although 5% VAT is lower compared to several other countries worldwide, it sets a precedent that governments in the GCC are willing to adopt subsidy cuts and levy taxes in order to strengthen their finances. The introduction of VAT would nudge consumers to spend more responsibly and change their spending patterns. Prices of products would also come down in order to match the demand eventually leading to a decrease in inflation.
 
This article is published in "Marmore Blog"

Tags:  Arabia, Estate, Real, Saudi, UAE, VAT

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 Current rating: 0 (3 ratings)

Brexit’s multi-level impact on GCC

Date : 28/06/2016
Author:  Marmore MENA

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The outcome of the vote and the resultant decision of Britain to leave the European Union (EU) caught the financial markets by surprise. The broad sell-off across continents and asset classes could be because of misplaced initial expectations for a “Remain” victory. Following the results, global markets lost USD 2.1 trillion in value while British pound dropped from a high of (GBP/USD) 1.50 to a low of 1.32 (fall of 13%), a new 30-yr low before recovering to close at 1.37 (loss of 8.1%).

GCC markets remained relatively unscathed except for UAE markets; Dubai index lost 3.3% while Abu Dhabi lost 1.8%. Dubai being largely a service economy driven by trade & services, tourism and real estate witnessed a fall as British pound lost 7.2% in value against UAE Dirham. Investor’s feared the depreciation of pound against AED would affect real estate investments and tourist’s inflow from Britain. Among non-GCC investors in Dubai, after Indians nationals, British nationals had invested AED 10billion (USD 2.7bn) in Dubai real estate in 2015 according to data from Dubai Land Department. Tourism inflow from Britain to the GCC would also get impacted on account of the depreciating GBP. 
 
How significant is Brexit?
In order to assess the significance of Brexit event we compare the equity volatility levels over the years. As seen in the figure, the equity volatility index implies an anxiety level that is much lower than the ones witnessed recently such as Chinese yen devaluation or the scare in February, 2016 when U.S Fed announced they wouldn’t rule out negative interest rates after Bank of Japan introduced negative rates.
 
Impact on GCC’s Economy 
Britain exit from European Union has added an element of uncertainty that could further dampen global economic growth by delaying capital expenditures and sapping global consumer confidence. Impact on oil would be minimal since Britain consumes only 1.6% of global consumption and ranks 15 among global consumers. The more serious impact would be if there is contagion to the rest of the European Union. Further, as capital shifts into safe haven assets such as U.S treasuries, it would lead to further strengthening of U.S dollar. . Stronger U.S dollar would make imports from Britain cheaper as most of the GCC currencies are pegged to U.S dollar. GCC imports a lot of luxury cars from UK manufacturers such as Bentley, Aston Martin etc. which would all become cheaper. Capital equipment imports from Britain for other sectors such as telecom, power etc. would also become cheaper.
 
The uncertainty caused by Brexit outcome would act as a headwind to global growth, particularly in the U.S, and as a result U.S Fed could delay increasing their interest rates. Lower interest rates for longer bodes well for GCC economies as it helps to revive their economies which are bruised by the fall in oil prices. GCC governments could act swiftly to raise capital from international bonds before the rates start rising again.

Protectionist policy to the fore
One of the important implications of the vote is that the positive effects of globalization have not trickled down to all. The growing inequality as a result of stagnating incomes, especially for low skilled workers, due to technological advances resulting in plateauing of labour productivity has led to displeasures among the voting majority. They largely feel threatened by trade and immigration policies and fear their jobs are either being replaced by immigrants or outsourced to people in emerging countries. Backlash on globalization doesn’t bode for emerging markets and in particular GCC economies as they have largely benefitted from free flow of capital, labour and goods.
 
Impact on GCC's Investments in British Real Estate
Realty agents and analysts opine the exit from EU would end the housing boom in Britain bringing the price rises to an abrupt halt. Realty transactions are bound to be thin as buyers would prefer to ‘wait and watch’. Commercial real estate, especially office spaces, would be hit as multinational organizations reassess their strategy to stay in London, which so far had served as a gateway for EU markets. It is estimated that over 100,000 jobs could be relocated out of London and as a result office rents could drop by as much as 18% in the next two years (Jefferies (Mike Prew), sourced from Financial Times).
 
Sovereign Wealth Funds (SWFs) and HNIs in GCC are known to invest heavily in London's real estate. For instance, Investors from the UAE accounted for more than 20% of buy-to-let property sales in the UK in 2015. Qatar Investment Authority (QIA) is among the high-profile investors in London real estate, snapping up landmarks such as the Shard skyscraper, Harrods department store and Olympic Village (Reuters). Value of their holdings would be marked down due to the fall in pound value. The ensuing uncertainty would lead to investors demanding a premium, subsequently, the prices could further decline. 
 
On the other hand, a steep fall in real estate prices in Britain (especially London) may also see fresh investments from GCC into the country on account of bottom fishing.
 
Impact on Trade with GCC
GCC region has been in talks with EU region for over 25 years and the Free Trade Agreement (FTA) between the regions is still pending. Having lost of access to EU, Britain to sustain its exports would be aggressive to sign bilateral trade deals. This presents an opportunity for GCC regions, especially Dubai, as it acts as a trading hub for MENA region as well as a gateway for African continent. Establishing bilateral trading agreement with Britain would be possible and this is a positive for GCC economies
 
Impact on GCC Equities
GCC equities may continue to fall in the short-term, in line with global trends, as risk aversion engulfs investor sentiments. However, we feel the direct impact of Brexit is minimal on GCC equities as their earnings prospects are little affected by the event. As a result, we expect equities to gradually recover as their movements are largely dictated by domestic factors and oil prices.

Tags:  Brexit, Economy, estate, EU, GCC, Investment, Real

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 Current rating: 4 (3 ratings)

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