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Al Mazaya Holding Weekly Report

GCC States Geared to Follow Suit with US Interest Rate Hikes

The Gulf realty sector will remain unaffected

Indicators of economic growth have proved the region’s economies resilient vis-à-vis besetting external headwinds. Citing reasonable growth rates, recent data shows that the forces of supply and demand have not been negatively affected, thanks to the GCC states’ robust trade relations with each other and around the world.

In its weekly real estate report, Al Mazaya Holding said the GCC states have managed to mitigate risks associated with challenges surrounding the region, thus developing efficient strategies and building fiscal buffers to safeguard themselves against decreasing revenues and budget deficits.

It is hardly possible to develop a direct assessment of the impact of some challenges on the economic situation in the region, said the report, citing the 25 basis point-hike in US interest rates by the US Federal Reserve, as the impact varies from one market to another. Home loan interest rates in the UAE, for example, differ even from one bank to another. In addition, UAE interest rates are already high, and therefore, any further hike by the UAE Central Bank will not have any bearing on the realty market, either among end-users or investors.

The report noted that the Gulf banking sector boasts fair liquidity levels and, therefore, any rise in interest rates will not have much impact on bank lending and credit volumes. In the meantime, the availability of cash is likely to boost competition among banks in terms of financing options. Therefore, borrowers would get their loans at the discretion of their banks in terms of costs, returns, liquidity volumes, target plans that differ from one fiscal period to another and level of collaterals provided by potential borrowers. Banks offering home loans are favorites because they are in consistent demand, compared to other commercial products that are usually vulnerable to market fluctuations.

In addition, real estate demand in the region’s markets is still below expectations, which means interest rates are more likely to increase, according to the report.

Financial decision-makers in the US usually keep a close eye on market reactions to any hike in interest rates, and accordingly, they take action to rectify it, said the report, citing two hikes in US interest rates in three months only, a development which proves how rapidly the US economy is progressing and recovering. Furthermore, market indicators reveal that US inflation rates are stable at the level set by the US Federal Reserve.

The region’s central banks are expected to follow suit with the US interest rate hikes, said the report, warning that if that has already commenced, the region’s countries should take actions to avoid a new economic crisis because their local currencies are pegged to the US Dollar. In addition, according to the report, such an increase in interest rates could cause investment-bound liquidity to flee from local markets in favour of dollar-denominated assets and projects.

The report added that any rise in interest rates would deplete cash from local markets, directing liquidity instead toward investment opportunities in the US market, which would augment economic pressures already faced by the region’s financial markets. This hike in interest rates would affect prices of stocks, commodities and property with the latter already having been going down over the past two years. In the meantime, the property sector would not be directly affected by the likely rise in interest rates as the decline in property prices is likely to offset a potential rise in bank lending rates. This is due to the fact that most of the real estate loans are offered at fixed rates, which means the real estate market would remain unchanged.

The region’s tourism sector is resilient enough to resist any negative impact by increasing interest rates, owing to consistent promotional campaigns and rates as well as the increasing number of tourist arrivals. In addition, the tourism platform is already booking high profits and the strategies adopted by decision makers are sufficient to mitigate any negative impacts.

In conclusion, the report noted that rising interest rates primarily benefit the US economy while their impact would vary from one market to another across the world, as further increases in interest rates are still a possibility. It expected that interest rate related decisions would generate more pressures on world economies such as US Dollar-denominated debts now account for 85% of the world’s total financial exchanges, a fact which could make it necessary for GCC states to look for a different currency peg over the coming period to circumvent further pressures on their economies.