What's at Stake this week?

April 2, 2023

Unsurprisingly, Dubai’s real estate market remained in the spotlight this week as over 3.16K transactions worth AED 8.6Bn in sales were recorded, bringing Q1 to a strong close. Top deals featured two land plots in Palm Jumeirah, in addition to 2.17K apartment and villa sales totaling AED 4.73Bn. Stay tuned for a Q1 market summary in our next issue, and a comprehensive property leasing report from the Stake experts delivered straight to your inbox!

📝Stake Shorts

Inflation-proof your investment portfolio

In today’s economy, who hasn’t heard about inflation or the (possibly) impending recession? Both remain prominent concerns, with the U.S. inflation rate hovering around 6% to 8% last year. As of February 28, 2023, the inflation rate stands at 6.04%. As inflation affects various asset classes, like bonds, stocks, and other financial assets, real estate investments, particularly income-generating properties and multifamily housing, have historically demonstrated a healthy track record and resilience against high-interest rates.

But what is inflation? Put simply, it is “the gradual increase in the price of goods and services in a given market”. As a result, each monetary unit can purchase fewer products and services, leading to a decline in purchasing power of currency. It can disrupt an economy’s pricing systems and inevitably corners individuals and businesses to make tough decisions regarding spending, saving, and investing. Ultimately, inefficient choices about money and wealth management reduce earning potential and hinder economic growth which can be mitigated by maintaining low levels of inflation, ensuring economic stability, and paving the way for more efficient resource utilization.

Where does real estate come into play in this context? Like gold, real estate performs well and even better during inflationary periods, so much so that the asset class has been deemed a reliable hedge against inflation. Let’s break down the three reasons why…

  • Rental income growth: During periods of inflation, rental income grows in tandem with prices, as costs associated with goods and services are passed on to tenants. This allows investors to sustain their returns over the inflationary period.
  • Capital appreciation: Investors can build long-term wealth through the value appreciation of their property as real estate prices generally follow an upward trend.
  • The intrinsic value of real estate: Real estate will always maintain its intrinsic value, relative to global population growth. As the population growth rate increases, so will the demand for real estate ownership or rental units.

Additionally, as housing development slows and demand for existing properties grows, occupancy rates usually increase, allowing landlords to raise rents, generate higher revenues, and further boost property values.

Despite the uncertainty surrounding the global economy which you can read more about below, the outlook for real estate investments remains positive. Research from property consultant, CBRE, found that a growing economy will drive demand for space and increase real estate investment across all property types.

The bottom line? Amid economic uncertainty and rising inflation, real estate investments stand out as a solid option for investors seeking to safeguard their portfolios. By offering the potential for capital appreciation, stable income generation, and inflation hedging, real estate can play a vital role in maintaining and growing wealth even in challenging economic environments.

📂ICYMI: The latest in the market

A lost decade in the making?

It’s official – the World Bank has sounded an alarm: the global economy could be nearing its “speed limit”. In its most recent report, published this week under the title “Falling Long-Term Growth Prospects: Trends, Expectations, and Policies”, the international financial institution has declared that the global economy could be nearing its “maximum long-term growth rate achievable without triggering excessive inflation”. It has also projected that by 2030, the world may face its lowest economic growth in 30 years as ongoing banking crises and looming recession fears are anticipated to leave lasting scars on economic development.

Between 2022 and 2030, the average global potential GDP growth is expected to fall to 2.2% per year, a notable reduction from the 3.5% rate observed during the early 2000s. Emerging economies are predicted to experience a similar dip, with growth rates decreasing from 6% to 4% annually which could be even more pronounced in the event of a global financial crisis.

Indermit Gill, Chief Economist at the World Bank, warns that the ongoing decline in potential growth could hinder the global community’s capacity to address urgent issues such as poverty, widening income disparities, and climate change. The current macroeconomic landscape, characterized by banking crises, surging interest rates, inflation, geopolitical strife, and skyrocketing global debt levels, only compounds these risks.

Despite these challenges, the World Bank believes that this decline can be reversed with the right policies as outlined in the report in the form of key actions that include aligning monetary, fiscal, and financial policies, ramping up investments in crucial sectors, reducing trade costs, and increasing labor-force participation.

In this case… By adopting ambitious, growth-oriented, and investment-driven measures that encourage collaboration among global economies, the international community can effectively navigate the economic slowdown. In doing so, the global economy’s speed limit can be raised, paving the way for a more prosperous and stable future for all.

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