Dubai: The Global Investment Hotspot

For the past five years I have traveled 8,000 miles from Dubai to Vancouver in July for the annual Agora Financial Investment Symposium to talk to up to a thousand mainly North American investors about investment in the UAE. This year it was good to be able to stand up and say: ‘Well, I told you so!”

With the Dubai Financial Market up 62 per cent in the year at the time of writing, housing rentals up the most in the world in the first half and house price gains also at the top of the league table, there is no doubt that Dubai is the standout investment hotspot of 2013.

Stellar gains on the S&P 500 pale into insignificance and the once mighty emerging stock markets of the BRICS have all stumbled badly this year. Only Dubai’s neighbor and capital city of the UAE federation, Abu Dhabi comes close with its bourse up 52 per cent.

It’s easy enough to dismiss this as an unsustainable boom, a bounce back from the severely over-sold market conditions of the Dubai real estate crash in 2009 and the debt crisis that ended with a $20 billion bailout from Abu Dhabi and $25 billion restructuring of Dubai World.

But there is plenty of reason to think that this is just the start of a multi-year opportunity for global investors.

Dubai stocks are still cheap on most valuation metrics. Local company profits are on the way up with banks reporting second half profit rises of 15-50 per cent over the past week. Consumer lending is picking up fast but this is only just compensating for debt repayments in the corporate and real estate sectors.

Real estate prices still mainly lag behind the peak prices of the boom five years ago, though they have bounced back from the 60 per cent price slump in the crash. In absolute terms Dubai homes remain cheap for a global hub city.

Local developers are now back in business selling off-plan again, having refinanced their debts cheaply with bond issues. So the profit cycle for business in the UAE is turning back up, and most of the quoted companies are banking and real estate related. That’s going to keep share prices going up for years.

Remarkably even after the 62 per cent price surge of this year the Dubai bourse is more than 70 per cent down on its rebased previous all-time of early 2006. Then price-to-earnings topped 40 compared with a modest 15 today.

This is quite a wall of worry to climb and there will of course be market setbacks as well as more advances like the one we have seen this year. But the UAE economy is benefiting from several unique factors that will carry it forward with higher GDP growth rates at a bad time for much of the global economy.

First, oil revenues remain very high thanks to consistently high oil prices as a side effect of money printing by the Fed. Secondly, interest rates are low for the same reason and previously high debts in Dubai have been refinanced cheaply with bonds at these low rates.

Third, the UAE is an expatriate economy – 80 per cent of residents are not citizens – and so does not have the legacy social costs of an advanced economy. Fourth, its leaders have made many wise investments in modern economic infrastructure, from Emirates’ fleet of 35 A380s to the Dubai Metro, or the Abu Dhabi nuclear power stations and Emirates Aluminum.

And finally the Arab Spring has actually benefited the UAE as a safe haven, rather like Switzerland used to be in the middle of a troubled Europe.

Tourists have almost nowhere else to go in the region. Rich people are relocating their families to Dubai and Abu Dhabi. This has helped to quickly soak up a huge backlog of empty property.

In short the investment flows that left the UAE in the 2009 crisis have reversed. You can date that to the signing off of the Dubai World debt rescheduling in August 2011. The recovery has been picking up speed ever since then but there is still plenty of upside for global investors. You ain’t seen nothing yet!