Crude Oil and Dubai Property Market
Crude Oil
Is another collapse in crude oil prices on the horizon?
Saudi Prince Abdul Aziz bin Salman's public rebuke of OPEC states that are cheating on their production quotas increases the risk that the kingdom may abandon its role as the cartel's swing producer and engineer another meltdown in oil prices. This last happened in November 2014 and again April 2020 after the Saudi-Russian spat at the OPEC conclave in Vienna.
In both cases, Brent crude plunged down to $28 and $20. With global consumption down 30% during the pandemic, any such shift in Saudi policy would mean credit catastrophe for the world's oil provinces. As Texas drillers bleed and die even at $40 WTI, it is imperative to slash US high yield exposure to zero. A $20 to $25 Brent crude range is also a disaster for global energy shares, petro-currencies and GCC asset markets. Black gold is a value trap at best and a bottomless black hole at worst.
Dubai Property Market
The COVID pandemic is a structural blow to Dubai property, mired in a protracted bear market since 2014 with price falls of 40 to 50% even in prime segments. The era of cheap cross border air travel, mass tourism and glitzy business travel is over.
Retail and hotels are in chronic distress, the expat exodus could exceed one million by 2022, means residential rents, values and prices will continue to tank. With vacancies in Business Bay at 50%, the era of telecommuting and Zoom makes investing in office CRE a no-no.
Aviation alone is 24% of Dubai GDP and mass job losses in this sector will hit rents, schools and retail very hard. Construction woes makes staff accommodation in a hunt for yield a fool's paradise with UAE banks having more than $130 billion exposure to CRE developers/contractors/home mortgages, I cannot see how an NPL spike and credit crunch can be averted.
This means deflation in prices until we reach Blackstone's idea of a bottom at 30 to 35% discount to replacement value. Any ideas?
Matein Khalid is the Chief Investment Officer of Asas Capital Management. He has 25 years of experience in international capital markets as an advisor to family offices and fund managers. He has worked for investment banks/hedge funds in New York, Chicago, London, and Geneva. In addition, he has been the CIO of a technology fund in San Francisco, a royal investment office in Dubai and a public insurance company listed on the DFM.