Main risks to watch for when investing in the uae

HOMEAPP & DAVIMA RESEARCH HOUSE

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MAIN RISKS TO WATCH FOR WHEN INVESTING IN THE UAE

There are some key factors which are essential for monitoring when investing in UAE property. Tracking these factors can enable to avoid potential risks.

Volatility of migration flow

UAE is a country where it is very difficult to obtain citizenship, which makes the population and the real estate market more volatile compared to the markets of other countries where the proportion of constant population is much higher. The government is gradually easing visa restrictions and makes reforms, which contributes to the growth of the share of so called "settled" population, which reduces volatility of migration. However, compared to countries with higher stable share of population it remains high. Without new reforms, the growth in population and as a result a demand for property may decelerate going forward.

Oil price trends

Economic dependence on oil prices is a risk inherent in many economies in the region, but the UAE economy is the most diversified of all and, as recent crises have shown, is can successfully weather volatility of oil prices. The country's large reserves also help to mitigate the negative impact on the budget from lower oil prices and continue infrastructure projects. For example, in 2014-2015, government investment did not decrease despite the fall in oil prices. However, prolonged period of low oil prices can affect the budget and the ecponomy as almost 30% of economy is still related to oil. Rising economic diversification will further reduce correlation of economic growth with oil price dynamics.

Political risks

Despite the geopolitical volatility of the region, the UAE economy has not witnesses any impact yet due to its pragmatic and neutral political position. Historically, the local geopolitical instability in the region has led to an influx of capital and population from conflict-prone countries to the UAE. Successful balancing between large rival geopolitical blocs could possibly provide benefits to the UAE, although risks remain.

At the same time the risks of a large conflict in the Gulf region, which could damage trade relations, could negatively affect the country's economy, especially the closure of the Strait of Hormuz. This could lead to disruptions in oil supplies and the blocking of other trade flows, which is especially harmful for the service-oriented (compared to its neighbours) economy of the UAE. At the same time, this scenario, according to leading analytical agencies, is not a baseline and will most likely be prevented by the efforts of countries with higher political and military power. This full-scale crisis is not beneficial for leading economies due to its distractive effect on trade and commodities flow.

Impact of neighbouring economies

The economic health of the countries - the main trading partners can also affect the economy of the region. While the economies of UAE key trading partners will likely continue growth according to reputable analytic agencies (including IMF) their dynamics and risks should be monitored.

As a partial mitigant, trading partners are quite diversified. The main part of non-oil exports is represented by gold - 42%, refined oil and bitumen products (6%) and aluminium (5%).

Chart: Non-oil exports to major trading partners (% of non-oil exports)

Chart: UAE imports from major trading partners (% of imports)