It is no secret that we are all entering 2023 with a considerable amount of caution. The post-lockdown bounce back saw a resurgence in demand for everything from cars to phones, quickly exerting crippling pressure on supply chains and manufacturing facilities worldwide.
The renewed appetite, following cash injections by some governments and increased liquidity, naturally stoked inflation in many countries, and interest rate hikes followed to limit consumer spending and curb demand.
Meanwhile, in our Middle Eastern markets, a period of sustained high oil prices has helped us offset some of the uncertainty around the world as our economies enter the new year with healthier balance sheets.
The IMF expects energy exporters in Middle East and Central Asia to earn a cumulative windfall of about $1 trillion over 2022-2026, with the Kingdom of Saudi Arabia (KSA) and other GCC exporters likely to benefit the most. Swift government action in countries such as the UAE in response to the pandemic have also been instrumental in preparing the country for change and the next stage of growth.
Real estate industry continues to thrive
However, given our peg to the US dollar, our policy action – namely interest rate hikes – will also mirror that of the US and therefore does not make us entirely immune to economic shocks being felt around the world. On the real estate side of the business, we are already seeing the effects of tighter liquidity, more prominently in some sectors than the others.
In the UAE, the prime residential real estate sector continues to thrive, as the desire to own a larger space in a location that offers a high-quality lifestyle continues to remain strong, amid thin supply.
One of the main reasons that this market continues to see strong transaction activity is that many buyers of prime property, especially those buying for end-use, are not as reliant on the mortgage market and have the appetite to transact in cash. It would be premature and perhaps too optimistic to say that the pace of price growth in this segment will continue unabated in 2023.
The other sector that will likely be more affected by tightening credit and economic uncertainties is commercial real estate. Whilst industrial warehouses continue to benefit from the deepening penetration of ecommerce, the office sector is expected to largely bear the brunt of potentially lower capital market investments globally.
According to the Savills Global Capital Markets Quarterly Update for Q3 2022, transaction volumes globally have fallen sharply, with higher debt costs and the deteriorating economic outlook starting to weigh on investment activity.
On the regional side, a factor that will likely cushion the impact of this is improving occupier markets. KSA will be leading growth in the Middle East, with its economy likely to expand by 8.3 percent in 2022 according to the World Bank, its strongest in a decade, which will also augur well for the commercial segment.
In the UAE, PMI data for the non-oil sector suggests that the country’s economic recovery is on firm footing and the GDP is expected to grow by 7.6 percent this year, according to the UAE Central Bank. Any continued growth in the non-oil sector will bode well for the overall economy and lead to high occupancy levels across the Grade A developments, which are already scarce, thereby pushing rental values upward going forward.
The region also boasts a strong development pipeline – the Middle East and North Africa have projects worth $1.4 trillion under various stages of development and planning.
Regional economies are without a doubt proving more resilient than expected to global headwinds such as higher inflation and rising interest rates, helped by encouraging policy action, investments into infrastructure, and development of talent.
However, any protracted global economic downturn will naturally impact our region. The resilience of global labour markets, the pause or even potential reversal of interest rate hikes, and easing of persistent inflation amid supply chain stresses and geopolitical uncertainty will all be the defining themes of 2023.