Is it time for UAE investors to switch their focus to secondary markets?

UAE Investors Urged to Consider Secondary Markets Amid Credit Surge

Is it time for investors in the UAE to reconsider their investment strategies, particularly regarding their focus on primary markets, and perhaps redirect their attention to secondary markets? The recent surge in credit supply to specific asset classes, whether it’s real estate or capital markets, has been a significant driver of price inflation. It’s a well-established phenomenon that when credit flows into an asset class, its prices tend to rise. This is particularly noticeable in real estate, where there’s a pronounced bias towards newly built properties, fueled by the belief that they will command higher prices than existing ones. However, this expectation doesn’t always align with reality.

In the realm of real estate, the trend of increased lending towards new developments has been apparent. This has led to the perception that newer properties, including off-plan projects, will inevitably trade at higher levels than existing ones. However, the data indicates that this bias towards new builds can lead to a distortion in pricing dynamics, especially in mid-income communities. Over time, the market tends to correct this imbalance as the investment-related credit fails to generate higher income levels from newer builds, resulting in lower yields.

Similarly, the capital markets have witnessed a surge in initial public offerings (IPOs), often characterized by significant oversubscription. Yet, the subsequent performance in the secondary markets doesn’t always mirror the initial enthusiasm. In many cases, returns primarily accrue through dividends rather than capital gains. This disconnect between primary market oversubscription and secondary market performance underscores the importance of evaluating valuations over the long term.

Recent data from the banking sector indicates a notable disparity in credit extended to new builds compared to existing properties, with new developments receiving more than a 30% increase in credit over the past two years. This surge in lending, coupled with the preference for the “new new thing,” can contribute to price overheating, marked by increased incentives and corporate activity.

This phenomenon raises questions about the sustainability of such pricing dynamics and the long-term viability of investments in primary markets. While primary markets may offer enticing prospects, particularly in terms of new developments and IPOs, investors should also consider the opportunities available in secondary markets. Shifting attention to secondary markets can provide a more balanced investment approach, especially considering the potential for more stable and sustainable returns over the long term.

Successful investing requires a clear understanding of fundamental principles and a disciplined approach that prioritizes long-term value over short-term excitement. Investors should welcome market corrections as they provide opportunities for strategic investment. In both real estate and capital markets, the shift towards secondary markets signals a healthy adjustment, with credit supply expected to adapt accordingly.

In essence, investors must remain vigilant and avoid succumbing to market hype. Just as in cricket, where watching the playing field matters more than the scoreboard, investors must focus on fundamental factors rather than short-term market fluctuations.