Why Warren Buffett thinks now is the time to invest in UAE housing

The local real estate has been the subject of much conjecture in recent months. But with local Purchasing Manager Indexes screaming an economic recovery this autumn, and US interest rates slated to fall pointing to lower-cost dirham mortgages, wary buyers risk missing the very bottom of the five-year bear market in UAE residential property.

The latest data from Reidin, a global real estate information company, showed 3,200 off-plan completions in the first five months of 2019, compared with 13,700 for the same period last year. Dubai developers know only too well that having completed units standing empty is an expensive proposition, so they have slowed completions to a snail’s pace this year. That means if the rebound in demand I’m anticipating actually happens, the supply of property will not be able to keep up with demand.

During the 2008 global financial crisis, there were thousands of empty units in the Dubai market alone, but the market rebounded in less than five years to a boom after steep falls in rents and property values, with the authorities doubling transaction fees and raising mortgage caps to keep it from getting out of hand. Those measures still remain in place, and could be lifted.

So what happened after that? Well, oil prices slumped in 2014 and while the UAE is a highly diversified economy, the rest of the Gulf region is not. The time lag between the oil price and the impact on local orders is around six months.

But oil prices have now recovered strongly from those lows, although they have still to match the $100-a-barrel enjoyed for the three years before that price crash.

That could happen this autumn or shortly afterwards. One very plausible global economic scenario has a Western stock market correction followed by a lowering of interest rates and other extraordinary monetary interventions and stimulus packages.

This was, after all, the scenario that played out in the financial crisis, and its immediate effect was to raise the price of oil and precious metals. And certainly, anybody that bought UAE real estate at that dismal time was laughing all the way to the bank just a few years later.

With almost 40 years’ experience in property investing and writing about global markets, I have seen many miraculous turnarounds. Let me share two examples.

In 1988, the British government ended joint mortgage taxation relief for house buyers and brought the 1980s housing boom to a close. This drove the housing market into its deepest post-war recession by compounding this with very high interest rates to keep the value of the pound up to shadow the then deutschmark.

The one-time world’s fifth richest man, Paul Reichmann - who I interviewed at the time when he arrived in London to takeover Canary Wharf - had become a minus-billionaire, as I dubbed him, when the massive project went into administration.

And yet this insolvency and George Soros’ breaking of sterling in late 1993 sounded the bottom of that long bear market. Those who bought London homes then cleaned up over the next five years, and indeed right up until the financial crisis.

What about Hong Kong after the British handover to China post-1997? Hong Kong was booming in 1997. But five years later in 2002 the SARS epidemic (or fear of it) and several other crises had reduced the city to such a state that hotels had to close. I recall reporting on the Grand Hyatt only having one guest for the night.

House prices in Hong Kong dropped 70 per cent and nobody would touch this Special Economic Zone with a barge pole. Yet where is the most expensive place to buy a home in the world today?

This is the Warren Buffett school of investing. Look for bargains amidst quality locations that are down on their luck, take a deep breath and buy something.

And which property market has the world’s most famous investor decided to back this summer, quite quietly and with no great fuss locally? Actually, Dubai.

Berkshire Hathaway, Mr Buffett’s main investment vehicle, has acquired Fine & Country (UAE), an estate agency. Now why would the Sage of Omaha bother to do that if the outlook for Dubai real estate was as negative as some commentators believe?

This is a very small investment for Mr. Buffett, his first-ever in the Arabian Gulf as far as I know. But it should provide an excellent return-on-investment if his long-term judgement on the market is correct. It is seldom wrong.

Peter Cooper has been writing about Gulf finance for two decades