Literature Review on "Financial System Reforms and Emerging Property Markets Performance in the Middle East"

Literature Review 30 pages (10927 words) Sources: 30

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Financial System Reforms

Over the last several years the property markets of: Egypt, Jordan, Kuwait, Qatar, Saudi Arabia, Syria and United Arab Emirates followed the performance of what was occurring worldwide. Where, prices are in a steady free fall following many years of appreciation. However, due to the overall amounts of speculation that was taking place meant that many of these once promising markets turned cold rather quickly. A good example of this can be seen in Egypt, where prices have fallen 37% in 2009. As many homebuyers canceled their down payments, which had a ripple effect on the commercial real estate market. This is despite the fact that on the lower end of the housing market there is a short of 40,000 units per year. (Egyptian Property Plunges 2009) What this shows is: the conflict that exists in these property markets, where there could be tremendous opportunity despite the massive implosion in prices. To identify the best opportunities as well as risks, requires that careful examination of these markets is conducted by: providing an overview of global property markets, the characteristics of these markets, the challenges of these markets, portfolio diversification, transparency / efficiency, property investment vehicles, property companies (PC's), real estate investment trusts (REITS), mutual funds (MF), the risks of investing in global property markets, emerging property markets in the Middle East, property market performance in the Middle East, property companies (PC) performance, the transparency of these emerging markets and the efficient market hypothesis. Together, all of these different elements will provide the greatest insights as to what issues are facing the real estate markets in the Middle East.

3.2 An Overview of the Global Property Markets

Global Property Markets are facing a number of different challenges as they go through a period of severe correction. This is following a steady appreciation in real estate prices led by the United States. Where, prices were increasing steadily between 2000 and 2006. Then, between 2006 and 2009, prices declined by 33%, following a massive bubble developed in the American housing market. This was fueled by easy credit and a speculative fever that would cause home price to rise by as much as 100% in some markets. (Mullins 2010) Because many of the different mortgages were underwritten, bundled together and then sold to investors around the globe, meant that the effects of the U.S. real estate market would spread worldwide. As many of these investors, were holding mortgages that lost their value, because of the bursting of the bubble in prices. This would have a ripple effect on real estate prices around the globe, where many markets that were appreciating in similar a fashion to the United States, began to see a serious decline in prices. A good example of this would be in Israel, as many people experienced tremendous prices appreciations in the properties they owned in North America and Europe. This allowed many them to sell their properties in these markets, then to invest the proceeds into real estate in Israel. As a result, Israel mirrored the housing appreciation seen in the United States, where the strong currency and real estate market around the globe caused prices to appreciate. Then, once the bubble in the U.S. real estate market burst; Israel began to experience a similar decline that was experienced in the United States. (Levin 2009) However, there are some places where the declines in real estate prices have not been as severe. This can be seen in Canada, where the overall decline in real estate prices has not been as severe as the United States. Part of the reason for this is the pace of the increase in prices was not as severe in comparison to the U.S. Recent evidence of this can be found in a report released by the Cleveland Federal Reserve, which found that housing prices rose twice as much in America compared to Canada. Once the slowdown came, the decline was not as severe in Canada in comparison with other parts of the world. (MacGee 2009)

What all of this shows, is how the worldwide real estate markets are following a similar general trend as to what is occurring in the United States. However, some of the different markets have their own unique characteristics, which provide both opportunities and risks for investors. Examples of this can be seen by looking no further than the real estate markets of Egypt and Canada. Where, Egypt has been seeing a sharp sell off in prices, following a period of large increases. While, at the same time they are having a housing shortage of 40,000 units each year in the low end housing markets. In the case of Canada, they saw a slower appreciation in prices during the boom years and are now seeing slower declines. The situation with both countries highlights how real estate prices are affected by local laws / regulations, interest rates and investing traditions. Together, these different elements underscore how the markets are interconnected, yet independent in their own unique ways.

3.2.1 Characteristics of the Global Property Markets

The global property market is at a cross roads, where globalization has interconnected the markets. Yet, depending upon the country and the real estate market within a particular country, a variety of different factors can have major effects. What happened was, as the world has become more globalized a new way to market real estate emerged, the tranche. This is where investment bankers figured out how to market mortgages to large institutional investors such as: mutual funds, hedge funds and insurance companies. (Lamb 2010) The way it worked is: the different mortgages would be bundled into one single group paying a stated interest rate. As the mortgage payments were being made to the servicer of these loans, they would pay the interest to the owner of these different tranches. As this became a more common way to of investing, the number of tranches grew dramatically. Then, when you consider the fact at how globalization improved access to FDI, meant that investors from around the world could purchase these kinds of investments. This is what has made the global property market more interconnected than at any other time in recorded history.

Beyond, the issue of tranches and globalization, the global property market is still decentralized. This is because depending upon the country, a variety of laws, regulations, demographics and customs are constantly affecting these markets. As a result, it has been harder for investors using a real estate strategy in one market or country to be able to export what they are doing, with the same kind of success elsewhere. This causes the prices of real estate to vary depending upon all of these different factors. (Lamb 2010)

Together, the combination of globalization and specific market factors are affecting how much real estate prices fluctuate up or down. As globalization has fueled the speculative fever that often invites large boom and bust cycles. (Lamb 2010) Yet, the severity of the up and down moves in the price of real estate depends on the factors affecting specific markets. This has caused some real estate markets to experience large amounts of growth during times of expansion; then during times of economic distress these markets experience a severe downturn.

3.2.2 Challenges in the Global Property Markets

The biggest challenges facing the global property markets are: large amounts of oversupply and overbuilding. During the boom years, a variety of commercial real estate projects began. These included everything ranging from the modest single family home to large commercial real estate projects. When prices were continuing to climb, many investors and developers assumed that the property would be worth considerably more in just a few years. Fueled by greed, many began to engage in real estate transactions that were not financially prudent. This caused for overbuilding to take place in both the commercial and residential real estate markets around the globe. Once demand for the various types of real estate began to decline, meant that the price of these different projects would decline. Since so much money was borrowed at higher real estate values, meant that that many individuals and corporations would have trouble maintaining the mortgage payments. This caused foreclosures to rise dramatically in both sectors. An example of this can seen in Cambodia, where prices followed a similar uptrend that occurred until 2008. Then, as the worldwide real estate market began to slow, prices declined by as much as 40%. (Far East Property Markets Expected to take off into 2010, 2010)

United States and Cambodia Real Estate Market Performance for 2009

What this shows, is that the biggest challenges facing the markets are a severe overhang of supply from large foreclosures and overbuilding in the real estate markets. These two factors will continue to affect prices well into the future, as the excess supply will take time to be removed from the various markets around the world. Once, these two issues have been addressed, real estate prices, can resume consistent price… READ MORE

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