Unitas Consultancy (A GLOBAL CAPITAL PARTNERS GROUP COMPANY) Q3 2016

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Brexit: Much Ado About Nothing

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Executive Summary

• UK’s vote to leave the European Union sparked an extraordinary period of volatility and panic in global markets, causing theFTSE, S&P, and DFM to fall nearly 5%. After ‘Brexit’ was declared, some analyst began to compare it to the World Financial Crisis,saying the impact would be catastrophic to the world economy. However as fears receded, market recovered quickly, with theexception of the British sterling.

• British investors have been a significant percentage of buyers of Dubai freehold real estate assets, doubling their exposure from2012 to 2015 (AED5B to AED10B). The recent fall of the sterling has caused for stress in the real estate markets, as peopleexpect UK investors to evaporate due to the devaluation of the currency. However, a correlation analysis of investment flowsagainst the currency movements over the last 5 years suggests a mildly positive relationship of 0.26, implying that whilstcurrency moves are a factor, there are a number of other variables that have overwhelmed the systematic depreciation of theGBP during this time frame

• A similar analysis was conducted with Indian Investments flows in the Dubai real estate market against the Indian rupee over theyears. It had the same correlation of 0.26 to that of Britain, implying that currency fluctuation is not pivotal in the decisionmaking process for overseas investments.

• The expansive fiscal policy the UAE has adopted is going to be the driving force of the economy. An analysis of bond marketissuance within the UAE reveals that in 2016 H1 the private and public sectors had issued bonds of USD11.93 Billion, which isnearly 76% of the full year of 2015 and 72% of 2014. This aggressive strategy to raise funding is inline with the expansive fiscalpolicy adopted by the government. Dubai, in particular, has increased its budget spend in 2016 by 11%, whilst the rest of regioncut back spending due to oil crisis.

• The impact of the ‘Brexit’ event will be played out over the next few years on a global stage that will continue to push markets inunexpected ways. However, the fear of a weakening currency and its impact on foreign real estate markets is likely exaggeratedand in point of fact, there might well be a positive impact on markets such as Dubai as foreign flows continue to gather pace,especially in light of the ensuing uncertainty that has been created as a result of the referendum

1 Brexit and The Markets

2 Currencies and Foreign Real Estate

1 Fiscal Stimulus on the Way

4 Conclusions

Contents

‘Brexit’ and The Markets

'It's not going to be an amicable divorce - it wasn't exactly a tight love affair anyway:' EU leaders

Market Tantrums on “Brexit”

Bre

xit

Bre

xit

In the weeks after the ‘Brexit’ event global markets fell by nearly 5% as fears of a 2008 redux permeated the ecosystem. However,soon after, concerns began to recede, global markets began to recover, except for the sterling. The above graphs illustrates the pricesmovements of equity indices during the month of Brexit in various markets.

S&P and FTSE (June 2016) DFM (June 2016)

3180

3200

3220

3240

3260

3280

3300

3320

3340

3360

3380

34004th July 2016

3000

3100

3200

3300

3400

3500

3600

3700

1900,00

1950,00

2000,00

2050,00

2100,00

2150,00

S&P

FTSE 350

7th July 2016

Source: Bloomberg

A Historical Look in the GBP: USD Relationship (1971-2016)

An historical look into the relationship between the GBP and the US dollar, shows a systematic devaluation over the last 35 years. Thisdecline in the currency levels has not hindered the ability of residents to invest in assets abroad, particularly in real estate assets inDubai.

USD:GBP

1,0000

1,2000

1,4000

1,6000

1,8000

2,0000

2,2000

2,4000

2,6000

2,8000

Source: FRED

Currencies and Foreign Real Estate

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists” -

Ernest Hemingway

British Investment Flows in Dubai Real Estate have doubled in absolute Quantum over 4 years

8,6%

91,4%

British Investors as % ofOverall Investors (Value)

Rest

3%

97%

2015 2012

The above graph reveals the growth of British Investors in the Dubai real estate market in the last four years. In terms ofthe absolute quantum the investment levels have doubled, but as a percentage of the overall value of transactions ithas nearly tripled. In 2007, the level of British Investments in Dubai real estate totaled AED 2.1 Billion, marking a near5x increase in the last 9 years.

British Investors as % of Total Real Estate Transactions in Value

5 Billion AED

154 Billion AED

10.8 Billion AED

135 Billion AED

Source: Dubai Land Department

9

Pound and British Buying Real Estate : 0.26% Correlation

-60%

-40%

-20%

0%

20%

40%

60%

80%

2012 H2 2013 H1 2013 H2 2014 H1 2014 H2 2015 H1 2015 H2

British Investment in Real Estate USD:GBP

The devaluation of the sterling after the ‘Brexit’ has sparked fears of reduced investment flows into the real estate market in Dubai.However we witness that over the last 18 months the sterling has devalued by 5%, but investment flows have continued to increase.Over a four year horizon, investment flows of UK investors in Dubai real estate assets against the sterling has a mildly positivecorrelation (0.26). This implies that the currency fluctuation is not a predominant factor in purchasing overseas assets. In point of fact,data reveals that even as the value of the GBP has declined over the last 9 years, money flows into Dubai’s real estate sector hassteadily ratcheted higher.

UK Investment Flows for Dubai Real Estate VS GBP:USD % Δ UK Investment Flows for Dubai Real Estate VS GBP:USD

1,2

1,3

1,4

1,5

1,6

1,7

1,8

0

1

2

3

4

5

6

7

2012 H1 2012 H2 2013 H1 2013 H2 2014 H1 2014 H2 2015 H1 2015 H2 2016 H1

British Investment in Real Estate USD:GBP

Source: Dubai Land Department

0,012

0,013

0,014

0,015

0,016

0,017

0,018

0,019

0,02

0

2

4

6

8

10

12

14

16

2012H1

2012H2

2013H1

2013H2

2014H1

2014H2

2015H1

2015H2

2016H1

Value (Aed)

Indian Rupee

Indian Investors and Dubai Real Estate Assets (+0.27)

-30%

-10%

10%

30%

50%

70%

90%

2012 H2 2013 H1 2013 H2 2014 H1 2014 H2 2015 H1 2015 H2

Value (Aed)

Indian Rupee

Indian Investment Flows for Dubai Real Estate VS USD:IND % Δ India Investment Flows for Dubai Real Estate VS USD:IND

The above graph illustrates the devaluation of the Indian currency against the investment flow from Indian nationals into Dubai realestate assets. Similarly to the UK, there was a low moderate correlation implying that currency fluctuation has a minor role in thisinvestment decision.

Source: Dubai Land Department

Fiscal Stimulus on the way

“The basic prescription for preventing deflation is straightforward, at least in principle: Use monetary and fiscal policy asneeded to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources

and low and stable inflation. In other words, the best way to get out of trouble is not to get into it in the first place.”Ben Bernanke

16.420 15.648

11.933

-

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

2014 2015 2016 H1

Bond Issuance within the UAE ratchets Higher

*The Gulf Bond and Sukuk Association

Mill

ion

(‘0

00

)

The above graph highlight the UAE bond issuance by value of both private and public sector entities. In the first half of 2016, the valueis already 72% of 2015, implying the liquidity within the system will continue to ratchet higher in order to pursue the ambitiousinfrastructure expansion program in place.

UAE Bond Issuance Value*

-20

-10

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Expenditure Revenues Defecit / Surplus

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2008 2009 2010 2011 2012 2013 2014 2015 2016

Change in Expenditure Change in Revenue

Dubai: The Lion in Winter (A look into the Budget Spending of Dubai)

Dubai Budget: Expenditure and Revenues Change in Expenditure and Revenue

After the 2008 global financial bust, Dubai (along with the rest of the world) responded by cutting budgetary expenditures,which amplified the contractionary impact on the economy. However, it is apparent from the chart above, that starting from2010, the government adopted a policy of sustained fiscal expansion, leading to constant increases in budgetary spending ona year over year basis. This has been true for 2016 as well, where Dubai has bucked the regional trend, announcing anincrease in budgetary spending of 12%. This continued expansionary stance has and will continue to percolate throughout theeconomy, making this cycle dramatically different from the 2008 episode.

Source: Unitas Consultancy / Reidin – “Dubai: The Lion in Winter”

Bill

ion

AED

ConclusionsBrexit and Dubai Markets Currency Movements and Foreign Investments

Fiscal Stimulus on the Way Conclusions

British Investors in the Dubaireal estate market in the lastfour years have doubled inabsolute quantum

A correlation analysis of UKinvestment flows against thecurrency movements over thelast 5 years suggests a mildlypositive relationship of 0.26

The ‘Brexit’ event will continue to play out overnext few years, creating uncertainty and instabilityin the UK and global markets.

However, it is clear that currency fluctuation don’tinfluence overseas buyers to the degree that willdrastically effect buying patterns.

The uncertainty in the UK markets could bebeneficial to Dubai real estate assets, as investorsdecide to reallocate portfolios out of fragile marketand depreciating currency and towards marketsthat have an expansionary fiscal bent.

The recent panic of ‘Brexit’ caused global marketsto fall by 5%, which included the S&P, FTSE, andthe DFM. As fear receded, the markets made aquick recovery, regaining the losses.

The sterling, which fell 10% on the day remainedat 30 year lows. Over the last 35 years the poundhas systematically devalued against the US dollar.However this decline in the currency levels hasnot hindered the ability of residents to invest inassets abroad, particularly in real estate assets inDubai.

An analysis of the correlation between the UKcurrency strength against investment flows showsthat there is a mildly positive relationship. ThisImplies that whilst currency moves are a factor,there are a number of other variables thathave overwhelmed the systematic depreciation ofthe GBP during this time frame. A similarrelationship can be witnessed in Indian investorsagainst their home currency.

British investors have continued to increaseexposure in Dubai real estate assets (increasing fromAED 5B to AED 10B in 5 years).

The UAE has adopted an expansive fiscal policy,which is reflected in their bond issuance in H12016. They have issued a total amount of USD 11.9B, which is equivalent to 74% of the full yearbefore.

The raising of liquidity by both the private andpublic sector is inline with funding their ambitiousproject.

Dubai has been the only city in the region that hasincreased its budget spend by 12%, whereas otherplaces were cutting budgets.

REIDIN.com is the leading real estate informationcompany focusing on emerging markets.

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Reidin is the data provider for these research reports

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