Why is Warren Buffett keen on Dubai real estate?

In: Blog
By: Prabhakar Raghavendra
Date: May 22, 2019
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Why is Warren Buffett keen on Dubai real estate?

Warren Buffett, one of the world’s most successful investors, bought his first share at the tender age of 11. He has since amassed massive wealth and grown into a larger-than-life figure. His investment mantra ⁽¹⁾is to buy, hold and not watch the markets too closely. In all his years of being in business, he was unperturbed by what the market had in store for tomorrow. According to Buffett, all that matters is if he is in the right economy. And this astute business motto of the billionaire investor makes his choice of the Dubai real estate market very significant indeed.

The real estate affiliate of Warren Buffett’s Berkshire Hathaway has recently announced plans to make a foray into Dubai real estate, in partnership with Gulf Properties⁽²⁾. The Berkshire Hathaway HomeServices Gulf Properties will be jointly led by Chairman Ihsan Husein Al Marzouqi and CEO Phil Sheridan. The brokerage firm will represent properties in Dubai valued at AED 3 million and above. The operation’s regional footprint will next extend to Abu Dhabi, with the opening of a second office within a year. To fully contextualize this move, it’s important to note that Warren Buffett’s insurance company, Berkshire Hathaway Specialty Insurance Co., has been operational in Dubai since 2018. However, the advent of the operations of a Warren Buffett led company, in the Gulf market, has implications that are perhaps best understood in light of his previous track record.

Berkshire Hathaway HomeServices

Buffett’s Berkshire Hathaway acquired HomeServices America as a part of a larger acquisition of a primarily energy-focused business in the year 2000. Although HomeServices was not among the billionaire’s priorities early on, it has since emerged as one of the largest brokerage firms in the US. The company did not seek an overseas franchise deal for 18 years, before teaming up with firms in Berlin, London and Milan. Dubai has now become only the fourth overseas market in the brokerage firm’s global expansion agenda.

Implications

The first half of 2018 witnessed over 16,000 overseas buyers acquiring properties in Dubai⁽³⁾. The total valuation of these holdings is in excess of $10 billion. Taking this as the precedent, Berkshire Hathaway HomeServices has set up shop in Dubai, hoping to leverage the interest of more prospective buyers in the future. Gemini Property Developers CEO, Sunil Gomes, believes that the entry of Warren Buffett has positive connotations that underscore the long-term growth prospects of Dubai’s real estate sector. Buffett is known to harbour a prudent approach and has displayed a penchant for acquiring assets in temporarily turbulent markets, in the anticipation that they will turn profitable in the future.

The stature of Berkshire Hathaway could be a persuasive argument for global real estate aficionados and investors, reinforcing interest in the Dubai real estate market. The esteem in which the firm’s strategic acumen is held could work wonders in Dubai’s interest, while solidifying the position of Berkshire Hathaway HomeServices Gulf Properties in the Emirates. The arrival of a big player like Warren Buffett could be the harbinger of an era of mergers and consolidations of smaller brokerage firms. This is especially likely since the firm believes that the Dubai market is over-brokered. According to Sunil, the brokerage business in Dubai could be in line for disruption, especially in the high-end market that has long been devoid of external intrusion.

Betting on Dubai

Surmising that Warren Buffett is an avid admirer of markets in a slump, why did he take a particular liking to Dubai? Sunil speculates the fact that Dubai was one of the few markets that survived the initial repercussions of the financial crisis of 2007–08 makes it an alluring option to bet on. The past decade has seen changes in regulatory structure, facilitating a safe haven in Dubai for investors and developers alike. Commission structures in real estate brokerage have risen from the typical 2% to as high as 5%⁽⁴⁾ in the last eighteen months, making the market especially lucrative for brokerage businesses.

Buffett’s bet also hinges on the demographic profile of the Emirates, and Dubai in particular. The city has witnessed rapid population growth in the last decade and continues to draw a steady population influx. With a yearly growth rate of 10.7%, Dubai is one of the fastest growing cities in the world. The city’s population surpassed 3 million in 2018⁽⁵⁾ and is expected to rise to 5 million by 2027 if the current rate of growth persists. Sunil believes that an investment veteran like Warren Buffett is likely to see population growth and real estate demand as two sides of the same coin.

The Warren Buffett Way

Investors have long been fixated with the Warren Buffett way. Although the man himself has been vocal about his methods throughout his long career in the investment business, he remains an enigma. He resents a short-term outlook towards real estate investments. Rather than being myopic, investors should buy properties that can be expected to fetch long-term profits, according to Buffett. His recipe for success has been vindicated through his longevity in the business and is a talking point in the upper echelons of the business and investing world. Investors follow his lead, and he could lead them to Dubai.

To Dubai’s credit, the city’s real estate market is showing glimpses of a promising future, driven by improved regulations and market confidence that is paving the way for stabilization. Adding the entry of Berkshire Hathaway HomeServices Gulf Properties to the mix will further augment investor confidence. Dubai is now an integral part of a global real estate network that is Warren Buffett’s brainchild, which is an enviable endorsement to receive. As CEO of HomeServices America, Gino Blefari puts it ⁽⁶⁾, “These are fun times for us. We’re the prettiest girl at the dance right now.”