UNITAS CONSULTANCY A GLOBAL CAPITAL PARTNERS GROUP COMPANY Q3 2017 Dubai: Yield Fallacy This document is provided by Unitas Consultancy solely for the use by its clients. No part of it may be circulated, quoted, or reproduced for distribution outside the organization without prior written approval.
Executive Summary A look into international real estate markets reveals that over the years there has been yield compression. In the United States from the 1960 s yields have declined 29%, whereas in the Hong Kong from 1999 yields have compressed by 34%. This secular decline (over a longer period of time for the US) reflect the structural decline in long term interest rates. Historically there has been a strong relationship between GDP growth rates and real estate price action. However, there have been times in history where the relationship has inverted. For example in the UK there have been periods with strong real estate price actions and weak GDP growth, and vice versa. In Hong Kong we can witness a similar trend, where over 16 years this relationship has broken down three times. This implies that there is not necessarily a symbiotic relationship between the two measures; rather real estate prices are affected by a confluence of forces including inflation and money flows. Similar to international markets we witness that there has been a yield compression in Dubai from 9% to 7% in the apartment space. The yield compression has transpired as function of price growth outpacing rents. In the 18 months prices have remained flat lined but rents have deaccelerated. Declining rental yields therefore appear to correspond to and are in sync with international trends, and appear to be unrelated to price concerns that have been publicly (and erroneously) expressed by the analyst community. Across major cities throughout the world, there has been a downward trending yield trajectory. Of all the major cities analyzed, Dubai remains far and above the highest yielding city, suggesting that there is ample room for further yield compression (partly a function of investors accepting lower risk premia) in the years ahead.
Contents 01 Global Real Estate Yields Trend Lower 02 GDP & Real Estate Growth Rates 03 A Look into Dubai Yields 04 Conclusions
Global Real Estate Yields Trend Lower It s easy to lie with statistics. It s hard to tell the truth without statistics. Andrejs Dunkels
Q1 1960 Q4 1961 Q3 1963 Q2 1965 Q1 1967 Q4 1968 Q3 1970 Q2 1972 Q1 1974 Q4 1975 Q3 1977 Q2 1979 Q1 1981 Q4 1982 Q3 1984 Q2 1986 Q1 1988 Q4 1989 Q3 1991 Q2 1993 Q1 1995 Q4 1996 Q3 1998 Q2 2000 Q1 2002 Q4 2003 Q3 2005 Q2 2007 Q1 2009 Q4 2010 Q3 2012 Q2 2014 Q1 2016 Jan-99 Sep-99 May-00 Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Real Estate Yields Trend Lower: US and Hong Kong USA Real Estate Price and Yields (1960-2016) Hong Kong Real Estate Price and Yields (1999-2017) $350,000 7% 180 000 9.0% $300,000 Prices Yields 160 000 8.0% $250,000 6% 140 000 120 000 7.0% 6.0% $200,000 100 000 5.0% $150,000 5% 80 000 4.0% $100,000 4% 60 000 40 000 3.0% 2.0% $50,000 20 000 Prices Yields 1.0% $0 3% 0 0.0% Source: Lincoln Institute of Land and Property / HK Gvot A look into international real estate markets reveals that over the years there has been yield compression. In the United States from the 1960 s yields have declined 29%, whereas in the Hong Kong from 1999 yields have compressed by 34%. This secular decline (over a longer period of time for the US) reflect the structural decline in long term interest rates. Furthermore, even as prices have re-rated higher, investors (in their search for yield) have accepted a lower rate of risk premia over time.
Jan-72 Feb-73 Mar-74 Apr-75 May-76 Jun-77 Jul-78 Aug-79 Sep-80 Oct-81 Nov-82 Dec-83 Jan-85 Feb-86 Mar-87 Apr-88 May-89 Jun-90 Jul-91 Aug-92 Sep-93 Oct-94 Nov-95 Dec-96 Jan-98 Feb-99 Mar-00 Apr-01 May-02 Jun-03 Jul-04 Aug-05 Sep-06 Oct-07 Nov-08 Dec-09 Jan-11 Feb-12 Mar-13 Apr-14 May-15 Jun-16 Jul-17 A look into the FTSE NAREIT US Real Estate Index FTSE NAREIT US Real Estate Index (1972-2017) 250.00 Price Index Yields 25.00 200.00 20.00 150.00 15.00 100.00 10.00 50.00 5.00 0.00 0.00 Source: REIT.com The FTSE NAREIT is an index that tracks the performance of the US REIT industry. Since 1972 the historical yield average has been 7.5%, whereas for the last 5 years yields have hovered below the 4% mark. We can witness that systematically there has been yield compression over the last 40 years as asset prices continue to climb. This yield compression further highlights the fact that yields have been declining throughout most developed markets.
GDP & Real Estate Growth Rates With too little data, you won t be able to make any conclusions that you trust. With loads of data you will find relationships that aren t real Big data isn t about bits, it s about talent. Douglas Merrill
1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 GDP and Real Estate Growth Rates: UK GDP and Real Estate Growth Rates: UK GDP and Real Estate Growth Rates: UK 50.0 40.0 GDP Real Estate 20.0 GDP Real Estate 15.0 30.0 20.0 10.0 10.0 5.0.0-10.0.0 1953-1954 1974-1975 1980-1981 -20.0-5.0 Source: Nationwide / World Bank Historically there has been a strong relationship between GDP growth rates and real estate price action. However, there have been times in history where the relationship has inverted. For example in the UK there have been periods with strong real estate price actions and weak GDP growth, and vice versa. This implies that there is not necessarily a symbiotic relationship between the two measures; rather real estate prices are affected by a confluence of forces including inflation, money flows etc. In particular, liquidity inflows have had a higher correlation to real estate prices in the last decade; more so than most other economic variables.
GDP and Real Estate Growth Rates: Hong Kong GDP and Real Estate Growth Rates: HK GDP and Real Estate Growth Rates: HK 50.0% GDP Real Estate 30.0% 40.0% 20.0% 30.0% 10.0% 20.0% 10.0% 0.0% -10.0% 2000-2002 2012 2015 0.0% -10.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-20.0% -30.0% -20.0% -40.0% -30.0% -50.0% GDP Real Estate Source: World Bank / HK GOVT In Hong Kong we can witness over 16 years there has been a moderately strong relationship between house prices and GDP growth (+0.4). However, similar to the UK within this time frame there have been periods where the relationship has reversed. This has increased in frequency (occurring three times over the last 15 years) where the relationship has broken down. This yet again highlights that real estate prices are influenced by a plethora of factors, and increasingly in major cities, have been influenced by international money flows rather than domestic growth.
A look into Dubai Yields There is no room for procrastination, no time for delay. History is a witness to all of us. HH Sheikh Muhammad bin Rashid Al Maktoum
2009-01-01 2009-05-01 2009-09-01 2010-01-01 2010-05-01 2010-09-01 2011-01-01 2011-05-01 2011-09-01 2012-01-01 2012-05-01 2012-09-01 2013-01-01 2013-05-01 2013-09-01 2014-01-01 2014-05-01 2014-09-01 2015-01-01 2015-05-01 2015-09-01 2016-01-01 2016-05-01 2016-09-01 2017-01-01 2017-05-01 2009-01-01 2009-05-01 2009-09-01 2010-01-01 2010-05-01 2010-09-01 2011-01-01 2011-05-01 2011-09-01 2012-01-01 2012-05-01 2012-09-01 2013-01-01 2013-05-01 2013-09-01 2014-01-01 2014-05-01 2014-09-01 2015-01-01 2015-05-01 2015-09-01 2016-01-01 2016-05-01 2016-09-01 2017-01-01 2017-05-01 Sales Price (AED/Sqf) Rent Price (AED/Sqf/Month) A Look into Dubai Prices, Rents, and Yields Dubai Real Estate Prices and Rents (2009-2017) Dubai Real Estate Yields (2010-2017) 1,600 9.0 9.5% 1,500 8.5 9.0% 1,400 8.0 1,300 7.5 8.5% 1,200 7.0 8.0% 1,100 6.5 7.5% 1,000 6.0 900 Prices Rents 5.5 7.0% 800 5.0 6.5% Source: REIDIN Similar to international markets we witness that there has been a yield compression in Dubai from 9% to 7% in the apartment space. The yield compression has transpired as function of price growth outpacing rents. In the 18 months prices have remained flat lined but rents have decelerated. Declining rental yields therefore appear to correspond to and are in sync with international trends, and appear to be unrelated to price concerns that have been publicly (and erroneously) expressed by the analyst community.
2009-01-01 2009-05-01 2009-09-01 2010-01-01 2010-05-01 2010-09-01 2011-01-01 2011-05-01 2011-09-01 2012-01-01 2012-05-01 2012-09-01 2013-01-01 2013-05-01 2013-09-01 2014-01-01 2014-05-01 2014-09-01 2015-01-01 2015-05-01 2015-09-01 2016-01-01 2016-05-01 2016-09-01 2017-01-01 2017-05-01 2009-01-01 2009-05-01 2009-09-01 2010-01-01 2010-05-01 2010-09-01 2011-01-01 2011-05-01 2011-09-01 2012-01-01 2012-05-01 2012-09-01 2013-01-01 2013-05-01 2013-09-01 2014-01-01 2014-05-01 2014-09-01 2015-01-01 2015-05-01 2015-09-01 2016-01-01 2016-05-01 2016-09-01 2017-01-01 2017-05-01 A Community-wise look into Yields Dubai Yields: Apartments (2009-2017) Dubai Yields: Villas (2009-2017) 14% 13% Apartment City-wide Downtown Dubai Marina Greens International City Discovery Gardens 7.5% 7.0% Villas City-wide Palm Jumeirah Arabian Ranches Springs and Meadows 12% 6.5% 11% 6.0% 10% 9% 5.5% 8% 5.0% 7% 4.5% 6% 4.0% 5% 3.5% 4% 3.0% Source: REIDIN In the apartment as well as the villa space in Dubai, rental yields have trended lower structurally since 2009, indicating that investors are willing to accept risk with lower risk premia. In the villa space, the standout has been Palm Jumeirah where yields have corrected significantly (perhaps indicating that this community, more than any other one has had higher levels of home ownership, especially given its trophy status). Other than that, both in the villa and the apartment space, yields appear to have converged with each other, even as yields have systematically trended lower.
Yields by Major City: 2011-2016 Yields by Major City (2011-2016) Dubai Hong Kong Singapore New York 2011 8.0% 3.9% 3.9% 4.8% 2012 7.6% 3.4% 3.6% 4.9% 2013 7.2% 3.7% 3.4% 4.7% 2014 7.0% 3.5% 3.4% 5.0% 2015 7.6% 3.8% 3.3% 4.6% 2016 7.4% 3.4% 3.2% 4.0% Source: REIDIN / HK Gov t / Zillow / Squarefoot Across major cities throughout the world, there has been a downward trending yield trajectory. Of all the major cities analyzed, Dubai remains far and above the highest yielding city, suggesting that there is ample room for further yield compression (partly a function of investors accepting lower risk premia) in the years ahead. This suggests a different outcome of discourse, from the consensus based cacophony of analyst concerns that have been expressed.
Conclusions Global Real Estate Yields Trend Lower GDP & Real Estate Growth Rates A look into international real estate markets reveals that over the years there has been yield compression. In the United States from the 1960 s yields have declined 29%, whereas in the Hong Kong from 1999 yields have compressed by 34%. Over time there has been yield compression in the international real estate markets. In the United States from the 1960 s yields have declined 29%. Since 1972 the historical yield average of the FTSE NAREIT has been 7.5%, whereas for the last 5 years yields have hovered below the 4% mark. there has been yield compression over the last 40 years as asset prices continue to climb In the Hong Kong from 1999 yields have compressed by 34%. Even as prices have re-rated higher, investors (in their search for yield) have accepted a lower rate of risk premia over time Historically there has been a strong relationship between GDP growth rates and real estate price action. However, there have been times in history where the relationship has inverted. For example in the UK and Hong Kong there have been periods with strong real estate price actions and weak GDP growth, and vice versa. This implies that there is not necessarily a symbiotic relationship between the two measures; rather real estate prices are affected by a confluence of forces including inflation, money flows etc. A Look into Dubai Yields Conclusions Historically there has been a strong relationship between GDP growth rates and real estate price action. However, there have been times in history where the relationship has inverted Similar to international markets we witness that there has been a yield compression in Dubai. In the apartment as well as the villa space in Dubai, rental yields have trended lower structurally since 2009, indicating that investors are willing to accept risk with lower risk premia. In the 18 months prices have remained flat lined but rents have deaccelerated. Declining rental yields therefore appear to correspond to and are in sync with international trends Across major cities throughout the world, there has been a downward trending yield trajectory. Of all the major cities analyzed, Dubai remains far and above the highest yielding city, suggesting that there is ample room for further yield compression (partly a function of investors accepting lower risk premia) in the years ahead. This suggests a different outcome of discourse, from the consensus based cacophony of analyst concerns that have been expressed.
GCP believes in in-depth planning and discipline as a mechanism to identify and exploit market discrepancy and capitalize on diversified revenue streams. Our purpose is to manage, direct, and create wealth for our clients. GCP is the author for these research reports REIDIN.com is the leading real estate information company focusing on emerging markets. REIDIN.com offers intelligent and user-friendly online information solutions helping professionals access relevant data and information in a timely and cost effective basis. Reidin is the data provider for these research reports Indigo Icon, 1708 Jumeirah Lake Towers, PO Box 500231 Dubai, United Arab Emirates Concord Tower, No: 2304, Dubai Media City, PO Box 333929 Dubai, United Arab Emirates Tel. +971 4 447 72 20 Fax. +9714 447 72 21 Tel. +971 4 277 68 35 Fax. +971 4 360 47 88 www.globalcappartners.com info@gcp-properties.com www.reidin.com info@reidin.com
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