Investments in Abu Dhabi
Counting good reasons for property in UAE is endless. If one wants to buy a real estate
in Abu Dhabi, one may find one’s self of receiving bonuses and benefits in
dollar terms in a future revaluation. This, indeed, could be that the UAE has
to undertake a series of currency realignments to more closely reflect the true
value of its currency.
The problem is that most of the UAE's exports, i.e. oil and gas, are priced in US dollars. On the other hand, the biggest share of imports comes from the Euro zone. Therefore, a falling US dollar causes inflation in the UAE. In addition, interest rates are lower than they should be to contain a booming oil economy.
No matter beneficial real estate in Abu Dhabi, there is also dilemma for the real estate investors. Revaluation could provide a nice bonus on a property purchase as opposed to keeping money in a US dollar deposit account, however, there is a possibility that local interest will start to rise. This will be a negative factor or loss on the part of the local real estate market.
In the end, it all depends on how big the revaluation actually is. If this happens, the local interest rates will start to rise. On small revaluation and other businesses, local interest rates will not have an impact.
If one wants to have higher interest rates, one suggests the UAE Central Bank to drop the dollar peg and move to a basket of currencies. This strategy was done by Kuwait.
In spite of that, real estate investors should be happy once this strategy has allowed the Central Bank to pursue a monetary policy more consistent with the long term interests of the economy. This might help to avoid a boom-to-bust housing entirely with local real estate prices currently low by world standards.
International institutional investors would also welcome a shift to a monetary policy that permitted a stabilization of the UAE economy, rather than one that leaves it exposed to Hong Kong style ups and downs in real estate.
For the US dollar currency peg in Hong Kong was a primary factor in the 70 per cent contraction of real estate prices when the post-1997 handover bubble burst, as the fixed currency exchange rate meant that the full pain of asset deflation was taken in the real estate sector and not dampened by devaluation.
Therefore, any move to revalue the UAE dirham will probably be welcomed by the real estate sector as providing existing investors with a nice bonus in dollar valuations, and a sign that the country is moving to a more sustainable cycle of economic growth.