Real Estate & Construction Gaining Momentum In 2015

The global economy has entered another period of uncertainty, with the Greek elections threatening to reignite the eurozone crisis and the dramatic fall in the oil price spooking markets.

However, key fundamentals such as strong growth forecasts in major markets such as India, the UK and US, a rising and more mobile world population, combined with rapid urbanisation suggest the long-term outlook for the real estate & construction sector in 2015 is positive.

In the UAE, despite the recent uncertainty due to the oil & gas sector, the real estate and construction sector is continuing to remain upbeat. Albeit challenging, the UAE is continuing with key construction projects in preparation for Expo 2020 along with meeting local market needs.

Within the wider GCC, Qatar and Saudi Arabia are continuing with the planned developments. They remain cautious for the time-being, but are optimistic that the market will continue to remain buoyant given the level of diversification these economies have invested in.

Business leaders in the sector remain resilient according to our International Business Report, a quarterly global confidence barometer. Expectations for increased revenues have averaged 51 per cent over the past 12 months, up from 48 per cent in 2013 and 38 per cent in 2012. Accordingly, hiring and investment plans have also ticked upwards.

The proportion of businesses citing a shortage of orders fell again, down to 34 per cent, from 35 per cent and 40 per cent in 2013 and 2012 respectively. The financial crisis hit the sector disproportionately hard and consequently, the recovery has taken some time. Our indicators are showing that businesses have had a renewed vigour over the past 24 months.

While real estate & construction businesses are not expecting to see prices decline (net 25 per cent of the sector plan to increase selling prices in 2015, which is marginally above the all-sector average), their profitability expectations have gone backwards in the past 12 months – down to 36 per cent, from 41 per cent in 2013 and the lowest since 2010.

This squeeze may be driven by slowing house prices in major markets such as the eurozone (up only 0.5 per cent year-on-year in 2014) and the US (4.3 per cent – the slowest in two years); while China actually saw a decline of 3.6 per cent. Of course, some markets have performed much better: UK and Ireland have seen double-digit increases (on the back of sharp downturns).

A highly leveraged sector means demand will be sensitive to monetary policy, however low inflation across much of the globe (driven in part by declining oil prices) means there is no upward pressure on interest rates in the key markets of China, Europe, the UK and US, indicating mortgage rates will stay lower for longer.

However, if any of these markets slip into deflation (inflation in the eurozone stands at 0.6 per cent excluding energy), then the long term real value of debt will rise, increasing repayment pressures on homeowners and developers.

Adding political uncertainty and weakness in the eurozone and Japanese markets into the mix makes it clear that the sector will face a number of challenges in 2015.

The good news is that capital inflows into prime residential and commercial property (from Russia into Europe and the UAE, and from China into Asia Pacific and elsewhere), are expected to remain strong.

This will create pockets of opportunity in major cities around the world, particularly established cities such as New York, Paris, Dubai and Hong Kong where urban renewal is generating desirable investment opportunities.

Dynamic businesses should be looking at how to tap into these opportunities. It seems the risk-reward trade-off from property investment could reach new heights in 2015.