Wednesday, June 06, 2007

Weak dollar great for Dubai's realty market

Despite the recent softening of the dollar, the UAE's decision to stick with the dirham's peg to it could spell a potential boon for the real estate market.

It comes at a time when many overseas investors, particularly from the euro-zone and India, are looking at property here as a medium-term investment option.

"If the central bank were to adopt a flexible exchange rate, rather than a peg to the dollar or a basket of currencies, then it would be able to gain control of interest rates," says Steve Brice, Regional Head of Research at Standard Chartered Bank.

"The good news for investors is this outcome looks unlikely at this juncture as the central banks in the region, including the UAE, do not appear to be ready to undertake this significant policy shift."

The dollar's softening against the major currencies in recent weeks has thrown up a multitude of possibilities for real estate investments from overseas.

Leading Dubai-based agencies have reported a pick up in interest from the UK and India during this period, though it is too early to say whether all of this is related to the currency situation.

Walter Hart, an independent property consultant, paints a scenario that could be of interest to an investor from the euro-zone.

"If funds are being brought into the country in order to purchase property in a non-dollar linked currency, such as pounds sterling, then property has been getting 'cheaper' by the day - almost," Hart contends.

The same property that is on the market at, say, Dh1 million would have cost around £170,000 a couple of years ago when the pound to the dirham exchange rate was at 1 to 6.

"It would now only cost around £140,000 at an approximate current rate of 1 to 7. If you are purely investing in the property market with a short- to medium-term plan to sell and repatriate funds to some other country, than these considerations take a very much more important role."

On June 7, it is launching the world's first Indian Rupee FX contract. It may be no coincidence that Indian buyers are expected to make their presence felt in Dubai's property market going forward.

Just recently, an Indian investor acquired an entire tower which is under development in Jumeirah Lake Towers.

"The recent strengthening of the rupee - it has risen over 15 per cent against the dollar in under a year - has necessitated the need for an efficient and easily accessible to all, risk management tool," says Colin Griffith, Chairman of Dubai Gold and Commodities Exchange, which is launching the contract.

But what would the mechanism mean for the property market here? With the Indian Rupee FX contract, an investor can sufficiently safeguard his interests against currency fluctuations.

For instance, if someone has Rs10 million today, that will fetch him Dh900,000 to buy property for that value. If after sometime the rupee strengthens the Rupee FX contract will hedge the risk for future currency movements. In other words the value of the futures goes up as the rupees falls.

Presently, for investors choosing between buying property in India or Dubai, the emirate offers at least 20 to 25 per cent more benefit on currency and interest rates. That could bring in a lot of short-term investors and speculators who would want to park money in Dubai property until the Indian market corrects.

[Source : Property Weekly]

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