AlAjaji: Real estate is the best investment to hedge against inflation
The founder and CEO of Driven Properties, Abdullah AlAjaji, is sending a message to venture capitalists to invest in the Arab region, especially in Saudi and the UAE, where financial markets there are bucking current trends witnessed in global stock exchanges while recording robust performances deemed among the best in the world today.
Al-Ajaji advises investing specifically in real estate, as it is “the most important hedge against inflation.”
He referred to the growing demand for real estate in Dubai, especially in the luxury sector, after a significant number of wealthy people came to live in the city. This prompted developers to start implementing new projects to meet the current and expected future demand.
The interview that Economy Middle East conducted with AlAjaji – who is on a list of the 100 most influential people in Dubai – was multi-faceted: from inflation to tight monetary policies, the prospects of a recession, opportunities available in the Arab region, the markets’ performance, and more.
Several factors have reinforced the global issue of inflation. Al-Ajaji lists some of them: Stimulus policies and generous liquidity approved by most governments during the outbreak of the Coronavirus in an attempt to mitigate its impact on economic activity; bottlenecks in supply chains; and an increase in demand without it being matched by a similar increase in production, which led to an increase in the overall prices of goods and services. Inflationary pressures were not limited to advanced economies only but were also felt by most emerging markets and developing economies.
The International Monetary Fund had stated in a note it published a few days ago on inflation that the package of stimulus financial measures announced globally amounted to $16.9 trillion in order to combat the effects of the Corona pandemic, and that these stimulus packages had inflationary consequences on economies.
“All these factors combined brought the economy to the state it is today, as global economic growth began to record declines from what was expected in earlier times when there was talk of an international economic recovery this year from Corona. Corporate profits also began to decline, coinciding with the tightening of monetary policies by the world’s central banks which increased interest rates in order to withdraw excess liquidity,” Al-Ajaji adds.
But will these tough policies help contain hyperinflation rates? “This is something to watch,” Al-Ajaji says.
The gap between regional and international economies
The paradox today is that there is a gap between regional and international economies. “It is the first time this has happened,” Al-Ajaji says, referring to the performance of the Dubai Financial Market and Abu Dhabi Securities Exchange, where companies and stock markets are recording profits. Generally, regional financial markets are also recording a strong performance, unlike the case of global financial markets. As a result, companies in the region are undertaking major expansions.
The remaining challenge is that pegging the currencies of Gulf countries to the dollar requires these countries to resort to increasing their interest rates in parallel with levels approved by the Federal Reserve, which in turn will impact inflation rates.
Central banks in the GCC have increased interest rates on deposits and lending in the wake of the US Federal Reserve’s raising interest rates by 75 basis points, last month. Saudi Arabia applied a smaller increase after the latest data showed a slight slowdown in the kingdom’s inflation.
On the other hand, Al-Ajaji believes that the strong dollar will push countries of the region to import from countries whose currency is now weaker against the dollar, such as Japan, China, the European Union, and Britain, and which means that imports will be cheaper, helping contribute to containing price inflation.
Where does Al-Ajaji see the investment opportunities being available today, in light of the situations in global financial markets and emerging markets?
“It is not currently possible to bet on Europe. It is suffering greatly with historical inflation rates against low economic growth, exacerbating poverty and high unemployment rates. The United States, for its part, will surely maintain its long-term growth and has plans to exit quickly and gradually from what it is facing. On the other hand, The Arab region, which ranks among emerging markets, such as the UAE, Saudi, and even Egypt and Turkey, is an important place for investments.”
But in what areas? “Real estate has always been a safe haven and the most important hedge against inflation as it is less volatile than other markets and assets. Hence, investors should look for available opportunities in the real estate sector in the region as their best risk-adjusted returns, considering that returns are still the highest in terms of the global average, while prices are lower than international rates. Occupancy levels in the region are also among the highest in the world.
The real estate sector in Dubai
The Dubai government has implemented many reforms to revive its economy in general, enhance the level of services and give the private sector a wide margin in the development of the economy. The UAE has adopted and reformed laws geared to these aims.
The Commercial Companies Law provides a dynamic and advanced investment environment and allows making continuous progress in facilitating the establishment and practice of business. Another is amending the law on foreign ownership of companies, and opening the door to naturalization.
These laws, and others, helped attract a large number of institutional investors to the real estate market in Dubai. It’s worth noting that since September 2020, the launch date of the “Dubai Expo”, the properties market is still rising, whether in terms of transactions or in marekt prices.
“The decision of many wealthy people to live in Dubai has contributed to the high demand for real estate in the city, especially the luxury sector, which has increased in demand in recent months following the outbreak of the Russian-Ukrainian war and the departure of wealthy Russians to live in Dubai,” says Al-Ajaji.
He lists some of the reasons behind the surging of the real estate market, including “the supply of high-quality real estate, which is still very limited in a few locations, in parallel with high demand which prompted developers to start implementing new projects to meet the current and expected future demand.”
The price rise in building materials affected the growth in the value of the property sector, increasing demand for already built properties, while significant increases in rent prices, and with it increasing property revenues, all made investors lean towards buying real estate, in search of higher rates of return on the property.
Real estate brokerage law
Last week, the Saudi Cabinet approved a real estate brokerage law. “It is a law very similar in spirit to the one adopted in Dubai, and what distinguishes this law is that it enhances transparency in the real estate market, and contributes to providing quality services that serve property dealers in the real estate sector. This law will enhance investors’ appetite.”
Saudi and UAE markets were the engines behind new initial public offerings (IPOs) this year, with the listing of a number of government companies on the stock exchange, the most important of which remains that of the Dubai Electricity and Water Authority (DEWA), which raised 22.3 billion dirhams, making it the largest in Europe and the Middle East over the last two years.
“There has been a positive boom in IPOs in the GCC, especially in Saudi and the UAE, due to a number of factors, including growth GDP rates, macroeconomic factors, and the availability of liquidity.”
The separation between regional and international economies may contribute to the tendency of investors to head towards financial markets in the region, despite the tremors in the stock and bond markets around the world as a result of investors’ fears of a possible downturn in the global economy.
Al-Ajaji expresses his optimism about the region’s economy in light of the great interest he attaches to strengthening the non-oil economy and expanding its share of the total economic output, as what is happening in Saudi and the UAE, and thus reducing dependence on oil revenues. In Saudi, for example, large investments are being pumped into vital projects such as the Riyadh metro, NEOM and the Red Sea project.
About “Driven Real Estate”
Founded in 2012, Driven Real Estate is a prominent real estate brokerage, investment, and advisory firm that provides in-house asset management, property management, and marketing advice.
The volume of real estate transactions it recorded exceeded 40 billion dirhams and the company employs more than 400 employees.
The company plays a major and important role not only in contributing to the legislative processes of the real estate market but in preparing supply/demand market studies in order to guide investors to low-risk investments.
The company has five branches in Dubai and is on the way to further expansion in the city, where opportunities appear very promising, as well as going for another branch in Riyadh, and in Shenzhen, China. It is in the process of opening a branch in Abu Dhabi before the end of this year, looking for new markets and available opportunities there.