Over the past two years, booming markets have sparked a buying frenzy for everything from stocks and cryptocurrencies to real estates and properties. However, the search for safe place investments is now in full swing with inflation at its highest levels.
Real estate is considered one approach to hedge against inflation, considering the asset class usually has low correlation with stocks and bonds. So obviously, investors interest is rising in this sector.
Faraz Ahmed, associate research at JLL MENA, claims to TRENDS that real estate is a valuable inflationary hedge since investors and landlords can expect rents on properties to increase along with the input costs (raw materials, labor, and goods) during periods of inflation. This could be mentioned, for instance, in agreements or rent renewals that permit rentals to be “marked to market.”
He said that investors and landlords could also pass on costs and expenses to tenants, thus protecting the owners’ net revenue. However, understanding the entire market context is critical in determining the relationship between inflation and rental income increase in this case.
Ahmed further stated that the balance of supply and demand, for example, will determine whether landlords can raise rents and whether demand increases as prices rise. This relationship varies according to country and property type. Overall, we would expect rental revenue and property values to stay pace with inflation in the long run.
Inflation may lead to a rise in real estate prices
Hawazen Esber, CEO of Integrated Cities Projects at Majid Al Futtaim Properties, said worldwide inflation might lead to higher real estate prices due to the higher operating costs. However, Dubai’s real estate market is becoming more appealing, making it more desired than the rest.
“Local real estate prices will be less high for foreign investors than other international markets, as local inflation rates are significantly lower than the rest of the world,” he noted.
In an interview with Al-Bayan, Esper noted that recent real estate laws and regulations effectively mitigate real estate market cycle swings, especially during inflation and the current global economic issues.
Saudi, UAE driving GCC real estate recovery
The real estate sector in GCC economies is on a healthy trajectory to accelerate in the second half of the year, according to Kuwait Financial Centre’s (Markaz) recent ‘Real Estate H2 2022 Outlook’ reports for the UAE and Saudi Arabia.
Based on the “Markaz Real Estate Macro Index,” the reports help investors identify the current state of the GCC real estate market through various economic indicators such as oil and non-oil GDP growth, inflation, new job creation, interest rate, and population growth, among others.
According to the “UAE Real Estate Outlook H2 2022,” the country’s real estate market has been heading upwards this year, with an increase in rentals and property prices. Along with an increase in prices, transaction volume in Dubai reached its highest quarterly total in the region in the first quarter.
The upward momentum in the national economy fueled by rising oil prices, growth in the non-oil sector and the success of Expo 2020 Dubai were among key drivers of growth in the real estate sector.
The report revealed that the property prices in the UAE continue their upswing momentum in 2022 with average residential property prices rising in both Dubai and Abu Dhabi by 11.3 percent and 1.5 percent respectively in the 12 months to March this year.
The report also forecasts that the real estate sector in the UAE is expected to accelerate in the second half of 2022. However, it pointed out that the Central Bank of UAE had raised interest rates in lockstep with US Fed and warned that higher interest rates were likely to affect consumer spending during the rest of 2022 and 2023.
On the other side, the ‘KSA Real Estate Outlook H2 2022’ showed that the Saudi real estate market had made a strong recovery from the pandemic-induced slowdown as demonstrated by the rise in the real estate price index by 0.4 percent year-on-year (y/y) in Q1 2022, mainly driven by a 1.8 percent y/y increase in residential land prices.
According to Markaz, the real estate land prices have been relatively stable in the recent past, showing mild growth.
Various measures taken by the government such as ensuring home ownership for all nationals and mandating regional headquarters for foreign companies have also given new impetus to the real estate sector. In addition, other government initiatives such as Sakani, which enables Saudi citizens to own their first home, and the Wafi off-plan sales and rent program boosted the demand for affordable homes, it stated.
It also noted that Saudi Arabia’s new giga projects including Neom, the Red Sea Project, and Riyadh’s Diriyah Gate signal a shift in consumer preferences and real estate development.
Though the real estate price index for Saudi Arabia is still below its 2015 highs, it has stabilized in recent quarters, it added.
Residential transaction volumes fell by 23.4 percent in Q1 2022 vs Q1 2021 and the total value of the transactions also fell marginally by 1.9 percent. On the other hand, the office sector’s performance improved across the kingdom in the first quarter of this year, with average rents for Grade A and Grade B office buildings climbing in Riyadh and Jeddah by 8 per cent and 3 per cent respectively.
With Saudi Arabia’s economic momentum expected to continue well through 2022 on the back of an anticipated increase in oil production, the country report forecasts that the real estate sector will show further stability with a chance of mild acceleration in the second half of the year.