Despite rising transactional volumes — turbocharged by post-handover plans and other incentives — the real question driving any dialogue in UAE’s real estate is whether there is enough demand to meet the supposed “floodgates of supply”?
Despite new launches, analysts fret about dropping enthusiasm levels among buyers, pointing to a widening gap between new builds and second-hand sales. The gap becomes wider still when the cost of money is embedded into new prices.
And despite the fact that second-hand sales tactics are rapidly catching up, developers have a key tactic — the down payment, which secondary market players have thus far not been able to match. Should they be worried?
Analysts definitely seem to think so, but then again, all analysts know, with King Lear (who was thinking of his daughters), how sharper than a serpent’s tooth it is to have a thankless reader. The problem, one of many, with this argument is that in most communities throughout the world, the second-hand process trades at a discount to new builds.
In suburban London, the discount is as much as 25 per cent; in Los Angeles, it is even higher. When we look at luxury communities, every standard of measurement goes awry, as there is no mechanism to measure prices that are in the eyes of the beholder. Price variance could exceed fourfold for houses that are literally next to each other.
Payment plans have added another layer of mathematical complexity to the pricing. In most markets, purchase prices would not include the cost of the mortgage. Over time, prices rose by more than the cost of the mortgage on average, allowing for capital gains all around and for default rates to be low.
When this was violated (most notably in 2008), banks were rescued. Then the process of credit expansion started all over again and house prices started rising. But these were the pre “fintech” days, where developers were not financing customers as a way of revitalising demand.
Whatever regulatory concerns that may have been expressed, the fact remains that volumes have risen steadily, and buyer depth has increased, allowing for urbanisation to continue in a city that continues to reinvent itself. Even as experts warn of further price drops, price indices are now starting to show the opposite, and developers, both big and small, are jumping on the bandwagon.
Despite the liquidity issues, there appears to be plenty in the ecosystem to continue construction. And even as analysts warn of falling demand and reduced earnings, equity prices are moving higher. It appears as If there is an endearing disregard for common sense here.
This is not to say that we need to be sanguine. Clearly challenges remain, with both liquidity and profitability, especially for smaller developers and contractors. But the obvious question remains: with so much pessimism being openly expressed, who is actually buying?
More to the point, why is it that they are continuing to buy when all the experts continue to sound alarm bells about the health of the market? It is one thing to say that there is smart money being allocated by institutional money managers. However, statistics indicate that purchasing is becoming even more broad-based, with newer nationalities entering the marketplace.
Much has been written about how economic narratives get overrun by overt pessimism, and even more has been written about the misplaced optimism that has been expressed by people such as myself. Rapid urbanisation throughout the ages has brought along with it periods of anxiety and hand wringing.
Every set of economic challenges require somewhat unique responses and in the so-called information age, the only variable that travels faster than the speed of light is angst. However, at its core, the role of demand and supply remains fundamentally the same.
To ignore these base assumptions is to be a stranger to what Diderot called “l’espirit de l’escalier” or the “staircase wit”. The go-go days of real estate flipping may well have been over for a while, but it is equally clear that market participants have refused to be inveigled into submission.
Sameer Lakhani is Managing Director of Global Capital Partners.
