Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
Unitas Consultancy (A GLOBAL CAPITAL PARTNERS GROUP COMPANY) Q4 2016
STRICTLY CONFIDENTIAL
Office No. 1706, Indigo Icon, Plot No. F, Jumeriah Lake Towers, Dubai, UAE 1
Dubai: Just Being Mean
This document is provided by Unitas Consultancy solely for the use by its clients. No part of it may be circulated, quoted, or reproduced for distribution outside the organization without prior written approval.
Executive Summary
• Mean reversion is a theory that suggests that trends and prices eventually revert towards their historical averages. This phenomena has been widely used as a statistical tool to analyze market conditions and predict price movements. A historical look into US and UAE equity market reveals that prices have reverted to their 12 month rolling averages over the last 10 years. Using the tool of mean reversion we can witness that in the US market current prices have deviated upwards from their 12 month rolling averages indicating that a correction is on the horizon. Whereas in the Dubai Financial Markets, recently prices have risen close to their 12 month rolling average signaling a buy.
• Similar dynamics are witnessed within the real estate market when analyzed through the lens of mean reversion. A look in the
price movement of the New York market reveals that for the last three years prices were rising above their 12 month rolling averages, however in the last few months we have seen prices reverting to their mean. If prices fall below their moving averages, using mean reversion as a stand alone technical indicator, we can expect prices to trend downwards. In Dubai, similar to the equity market, real estate prices are close to rising above their 12 month rolling averages; signaling an inflection point has been reached and price rises (already being witnessed in certain communities) is underway.
• Launch prices and ready prices also have a mean reverting relationship, where the latter is a leading indicator of the former. This can be witnessed across various communities such as Downtown and Arabian Ranches. In both cases there were launches above and below the price index depending on the market condition, but eventually prices converged.
• We opine that mean reversion implies that a price rise in the real estate markets is underway. The nature of the two moving
variables is symbiotic and iterative in nature, and the nature of any price rise will always be different from cycle to cycle and will be different across communities. However, the high order relationship that has historically held across markets implies that a price rise will continue to be witnessed.
Dubai: Just Being Mean Q4
1 Mean Reversion and Equities
1 Mean Reversion and Real Estate Prices
1 Launches, Prices, and Mean Reversion
1 Conclusions
Contents
Mean Reversion in Equities
The boom and the bust were normal—just two more swings in stock returns over the past century. Reversion to the mean is the iron rule of the financial markets. – John Bogle
Mean Reversion in US Equities
700.00
900.00
1100.00
1300.00
1500.00
1700.00
1900.00
2100.00
2300.00
20
06
-10
-01
20
07
-01
-01
20
07
-04
-01
20
07
-07
-01
20
07
-10
-01
20
08
-01
-01
20
08
-04
-01
20
08
-07
-01
20
08
-10
-01
20
09
-01
-01
20
09
-04
-01
20
09
-07
-01
20
09
-10
-01
20
10
-01
-01
20
10
-04
-01
20
10
-07
-01
20
10
-10
-01
20
11
-01
-01
20
11
-04
-01
20
11
-07
-01
20
11
-10
-01
20
12
-01
-01
20
12
-04
-01
20
12
-07
-01
20
12
-10
-01
20
13
-01
-01
20
13
-04
-01
20
13
-07
-01
20
13
-10
-01
20
14
-01
-01
20
14
-04
-01
20
14
-07
-01
20
14
-10
-01
20
15
-01
-01
20
15
-04
-01
20
15
-07
-01
20
15
-10
-01
20
16
-01
-01
20
16
-04
-01
20
16
-07
-01
S&P 500
12 Month Rolling Average
S&P Price Index and 12 Month Rolling Index
Source: FRED
An analysis of the S&P over the last decade illustrates the relationship of mean reversion in the equity market. Prices tend to gravitate towards their mean (rolling 12 month average) over time after prices have deviated from their historical averages. Using the sole metric of mean reversion we can conclude that the S&P in its current state is due for a correction as prices trend downwards towards their mean levels.
Mean Reversion in Equities | Dubai: Just Being Mean Q4 2
Mean Reversion in the Dubai Financial Markets
DFMGI and 12 Month Rolling Average
Source: Investing.com
In the Dubai Financial Markets, we witness that mean reversion has played over the last 10 years. In the last half we witness that prices have risen above their 12 month rolling average signaling a bull rally is on the horizon.
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
20
04
-12
-01
20
05
-04
-01
20
05
-08
-01
20
05
-12
-01
20
06
-04
-01
20
06
-08
-01
20
06
-12
-01
20
07
-04
-01
20
07
-08
-01
20
07
-12
-01
20
08
-04
-01
20
08
-08
-01
20
08
-12
-01
20
09
-04
-01
20
09
-08
-01
20
09
-12
-01
20
10
-04
-01
20
10
-08
-01
20
10
-12
-01
20
11
-04
-01
20
11
-08
-01
20
11
-12
-01
20
12
-04
-01
20
12
-08
-01
20
12
-12
-01
20
13
-04
-01
20
13
-08
-01
20
13
-12
-01
20
14
-04
-01
20
14
-08
-01
20
14
-12
-01
20
15
-04
-01
20
15
-08
-01
20
15
-12
-01
20
16
-04
-01
20
16
-08
-01
DFMGI
12 Month Rolling Average
Mean Reversion in Equities | Dubai: Just Being Mean Q4 3
Mean Reversion in Real Estate Price Action
“Yes, our tree has an interesting shape. The center branches reflect the shape of the zero curve. When extreme parts of the tree are reached the branching pattern changes to accommodate the mean reversion.” - John Hull
0
200
400
600
800
1000
1200
1400
1600
20
03
-01
-01
20
03
-05
-01
20
03
-09
-01
20
04
-01
-01
20
04
-05
-01
20
04
-09
-01
20
05
-01
-01
20
05
-05
-01
20
05
-09
-01
20
06
-01
-01
20
06
-05
-01
20
06
-09
-01
20
07
-01
-01
20
07
-05
-01
20
07
-09
-01
20
08
-01
-01
20
08
-05
-01
20
08
-09
-01
20
09
-01
-01
20
09
-05
-01
20
09
-09
-01
20
10
-01
-01
20
10
-05
-01
20
10
-09
-01
20
11
-01
-01
20
11
-05
-01
20
11
-09
-01
20
12
-01
-01
20
12
-05
-01
20
12
-09
-01
20
13
-01
-01
20
13
-05
-01
20
13
-09
-01
20
14
-01
-01
20
14
-05
-01
20
14
-09
-01
20
15
-01
-01
20
15
-05
-01
20
15
-09
-01
20
16
-01
-01
20
16
-05
-01
20
16
-09
-01
Prices
12 Months Rolling Average
When prices fall below their moving average it signals a sell, but when it rises above it is a buy signal. The above graph illustrates the times in the Dubai real estate market when prices have crossed over their rolling averages. In both instances (2008 and 2014) when the correction began, prices fell below their rolling averages. In the current cycle we can witness that prices have risen close to its rolling average indicating that an upward trend is on the horizon.
Technical Inflection Point reached in Dubai Real Estate Prices
Dubai Real Estate Prices and its Trend Line
Source: REIDIN
Mean Reversion in Real Estate Price Action| Dubai: Just Being Mean Q4 5
The same patterns can be witnessed in other major markets such as New York. The above graph reveals that every time prices move above or below their moving average an inflection point occurs. Recent prices in New York have begun to taper towards their mean.
Mean Reversion Implies New York Prices may be on the Fall
New York Prices and its Trend Line
Source: Zillow
$450,000
$470,000
$490,000
$510,000
$530,000
$550,000
$570,000
$590,000
20
06
-09
-01
20
06
-12
-01
20
07
-03
-01
20
07
-06
-01
20
07
-09
-01
20
07
-12
-01
20
08
-03
-01
20
08
-06
-01
20
08
-09
-01
20
08
-12
-01
20
09
-03
-01
20
09
-06
-01
20
09
-09
-01
20
09
-12
-01
20
10
-03
-01
20
10
-06
-01
20
10
-09
-01
20
10
-12
-01
20
11
-03
-01
20
11
-06
-01
20
11
-09
-01
20
11
-12
-01
20
12
-03
-01
20
12
-06
-01
20
12
-09
-01
20
12
-12
-01
20
13
-03
-01
20
13
-06
-01
20
13
-09
-01
20
13
-12
-01
20
14
-03
-01
20
14
-06
-01
20
14
-09
-01
20
14
-12
-01
20
15
-03
-01
20
15
-06
-01
20
15
-09
-01
20
15
-12
-01
20
16
-03
-01
20
16
-06
-01
Price Rolling 12 months Average
Mean Reversion in Real Estate Price Action| Dubai: Just Being Mean Q4 6
An analysis of rental yields in Dubai using the lens of mean reversion implies that the current rental cycle is in the midst of a “long term” secular downtrend of a gradually lower rental yield. Given the bivariate nature of the relationship in this case, this implies that either prices rise and/or rental rates continue to fall. Historically, the relationship has implied that price rises (not only in Dubai but globally) accounts for a greater weightage in determining the fall in yields than movements in rents; a trend that we opine will continue.
Mean Reversion on Yields Signal Rents on the Rise
Dubai Real Estate Yields and 12 Month Rolling Average
Source: REIDIN
6.50
7.00
7.50
8.00
8.50
9.00
Yield
12 month rolling Average
Mean Reversion in Real Estate Price Action| Dubai: Just Being Mean Q4 7
Prices, Launches, and Mean Reversion
“Seven years of great abundance are coming throughout the land of Egypt, but seven years of famine will follow them” – Genesis
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
City Wide Price Index
When we look at major launches of Emaar in the apartment space since the inception of freehold, a steady upward relationship can be discerned; however the more recent launches indicate a diversion of the strategy from high community launches and a return to first principles similar to what was in place in 2002-4. This change in strategy has also been mean reverting, where a major developer has recalibrated or “reset” prices; we expect other developers to follow suit.
Emaar launches and Prices: Horizontal Living
Source: REIDIN/UNITAS
The Slope of the Cycles | Dubai: The Nature of Dawn Q3 2
Downtown (First Wave)
Greens
Dubai Creek
Views Park Island
(Dubai Marina)
Downtown (Second Wave)
Dubai Hills Urbana
Dubai South
Major Vertical Living Launches From Emaar
Price Action and Launches: Downtown
Launch Prices and Ready Price : Downtown
Source: REIDIN / UNITAS
750
1250
1750
2250
2750
3250
3750
2003 2005 2007 2009 2011 2013 2015 2017
Downtown Price index
The above graph illustrates the launch prices of projects against the price index in Downtown. The scatter gram for the downtown area indicates prices launches both above and below the price line; what we do observe is that in the last few years the relationship has become tighter; in other words the gap between launch prices and the price index has narrowed considerably, again illustrating the concept of hugging the mean.
Price, Launches and Mean Reversion | Dubai: Just Being Mean Q4 10
South Ridge Loft 8 Blvd Walk
Burj Views
Blvd Central
29 Blvd
Stand Point
The Address BLVD Burj Vista
Opera Grand
Address Fountains Views 3
Address Fountains Views 1+2
Blvd Crescent Blvd Heights Blvd Point
Forte
ACT1/ACT2
Conclusions
Mean Reversion and Equities Mean Reversion and Real Estate
Mean reversion is a theory that suggests that trends and prices eventually revert towards their historical averages
When prices fall below their moving average it signals a sell, but when it rises above it is a buy signal
Equity markets have a mean reverting relationship. Prices tend to gravitate towards their mean (rolling 12 month average) over time after prices have deviated from their historical averages. A closer look in to the S&P and DFM reveals that over the last decade both indices have exhibited behavior of mean reversion. Using the sole metric of mean reversion we can conclude that the S&P in its current state is due for a correction as prices trend downwards towards their mean levels. Whereas in the DFM prices have risen above their 12 month rolling average signaling a bull rally is on the horizon.
Real Estate prices, similarly to equities, demonstrate a mean reverting behavior. A technical analysis of the Dubai real estate market reveals that a bull rally is on the horizon as prices rise above their historical 12 month average. An analysis of another major real estate market, New York, shows a different outcome. The price movement of the New York market reveals that for the last three years prices were rising above their 12 month rolling averages, however in the last few months we have seen prices reverting to their mean. If prices fall below their moving averages, using mean reversion as a stand alone technical indicator, we can expect prices to trend downwards.
An analysis of launches of major communities by Emaar reveals a steady upward relationship. However the more recent launches (ala Emaar South) indicate a diversion of the strategy from high community launches and a return to first principles similar to what was in place in 2002-4. There is a strong element of mean reversion in the strategy. We opine that other developers follow suit.
Prices, Launches, and Mean Reversion Conclusions
Macro economic factors (oil price reduction, Brexit, etc) alongside endogenous variables (supply pipeline) ultimately get baked into the data. These data patterns have exhibited a universal trend of mean reversion; where we are at the current stage of the cycle implies strongly that the price trend is to drift upwards. This trend is already underway across communities, and is a trend that we opine will continue.
REIDIN.com is the leading real estate information company focusing on emerging markets. REIDIN.com offers intelligent and user-friendly online information solutions helping professionals access relevant data and information in a timely and cost effective basis. Reidin is the data provider for these research reports
Concord Tower, No: 2304, Dubai Media City, PO Box 333929 Dubai, United Arab Emirates Tel. +971 4 277 68 35 Fax. +971 4 360 47 88 www.reidin.com [email protected]
GCP believes in in-depth planning and discipline as a mechanism to identify and exploit market discrepancy and capitalize on diversified revenue streams. Our purpose is to manage, direct, and create wealth for our clients. GCP is the author for these research reports
Indigo Icon, 1708 Jumeirah Lake Towers, PO Box 500231 Dubai, United Arab Emirates Tel. +971 4 447 72 20 Fax. +9714 447 72 21 www.globalcappartners.com [email protected]
Our Aspiration and Motto
“No barrier can withstand the strength of purpose”
HH General Sheikh Mohammed Bin Rashid Al Maktoum The Ruler of Dubai and Prime Minister of UAE