Lots of smoke, where’s the fire?

source Arabian Business

Global economic slowdown or crisis of confidence? Matt Warnock asks industry experts whether it's the real deal, overreaction or simply a lack of preparation, and what will the consequences be?

Run through a room shouting "fire" and it's guaranteed that, in spite of no supporting evidence, panic will ensue; some people will even claim to smell smoke. The collective reaction is part of human nature. It's impossible not to wonder whether the same theory is running amok through the GCC's economy right now.

Talk to developers, agents, financiers, investors, lawyers...they'll all tell you the same thing: the real estate market is presently suffering badly but, hopefully, it's an affliction that won't last too long.

Outwardly, the signs are far from positive. Emaar made 300 employees redundant last month; meanwhile, MiNC was embarrassingly forced to ask investors for extra capital to cover construction costs on its Prodigy development in Dubai's Jumeirah Village.
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"The arrival of the global financial crisis has had a severe impact on the monies MiNC has available to build Prodigy 1. We are no longer able to subsidise construction of the project; it needs to be self-funded as originally intended," explained MiNC's CEO in a letter to investors.

Finance and liquidity are, of course, at the heart of the problem; and it's one that, according to the founder and CEO of Rasmala Investments, is only set to get worse for many companies. "The off-plan market - which has been known to drive up real estate prices - will soon disappear in the UAE," claims Ali Al-Shihabi.

"In general, completed or near-completed properties will witness a temporary decline in prices, but they will not face difficulties as UAE banks are expected to meet their existing obligations to projects.

On the other hand, the paper market - including off-plans - will simply die, because developers will be unable to secure financing for the foreseeable future."

The final nail in the coffin would be if the lack of liquidity, banks' reluctance to lend against yet-to-be-built properties and reduced speculative appeal were to also result in a lack of buyers for those off-plan properties that do manage to find financing.

An enviable slow down

So, the smoke is certainly billowing, but is there actually fire? The issue with recession, economic slow down, credit crunch - whatever term you choose to use - is that it can be a self-fulfilling prophecy.

Throw it around too liberally and mass panic ensues. There's evidence to suggest that developers have a skewed notion of what a slump actually entails.

"The global financial crisis notwithstanding, Dubai remains one of the most attractive destinations for investors from all over the world with over AED 158 billion invested since the beginning of 2008 to date, in comparison to total investments of AED 151 billion last year," remarked Ahmet Kayhan, CEO of REIDIN.com, last month.

Markedly, the notion of the credit crunch hampering investment from outside the Gulf region was also rebuffed.

"Our statistics indicate that the top ten investors that have channeled funds towards real estate in Dubai hail from India, Pakistan, Russia, Saudi Arabia, UK, Oman, Iran, Canada, Bahrain and Kuwait."

As far as fires go, it's hardly devastating. "What is strange is that there's all this talk of a slow down but we're still selling more than we ever have," said Hyder Consulting regional director Stephen Oehme at the recent Construction Week Conference. "It's a slow down to a point we've not yet even arrived at."

Therefore, to be clear, developers are still seeing month-on-month sales increases; the problem - such as it is - is simply that those sales increases are less remarkable than they have been previously. Given the adversity facing the rest of the world, it's relatively small fry.

Survival of the flexible

If anything, GCC developers are presently suffering the effects of mindless over-reaching; the assumption that 60% quarterly increases would continue ad infinitum and dispensing with any form of contingency plan are the reasons for the job cuts and the scaling back we're now seeing.

This crisis can be traced back to July 2007, after all, when the USFR and ECB had to pump significant capital into the US financial markets, so developers here can hardly claim to have been blindsided.

Last month, VIP Waterfront slashed off-plan prices on their Royal Bay and Royal Lagoon projects by 30% - reported as an indication of just how dire conditions in the GCC real estate market had become.

However, Slava Garin, that company's CEO, sees it differently. "It's true, we cut prices by a third but that's something we're very comfortable with. The market was coming to a standstill, so we've taken action to take advantage of the situation."

The problem, says Garin, is that prices in the GCC - and Dubai in particular - had been unrealistic for too long. "Actually, it's not specifically the prices here that are a problem, as much as the general attitude to real estate worldwide.

The increases in Dubai have not corresponded with the actual economic growth of the country and it was inevitable that, at some point, they would have to fall back in line.

For VIP Waterfront, spurring that market change has meant significantly cutting profit margins, although Garin is quick to note just how huge those margins were. "For these developments, we run at profits of between 100 and 300%," he explains. "If we start taking profits of 40 or 50%, that's still great.

That's better than developers in the UK or USA, plus there are no taxes here in Dubai. We'd previously considered cutting margins but feared that it would have looked as if there were something wrong with the project. This gives us an opportunity."
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His company is fortunate in being able to offer these ‘normalised' prices, as it's still early in the sales process and, therefore, can reduce prices retrospectively for those who have already invested. Developers who have sold 60% of their projects can't afford to do that and reducing prices now would breach investors' rights and open developers up to accusations of manipulating the market or false promises.

Facing up to the challenge

Master developer Limitless, therefore, has taken a different approach, holding back on selling plots of land on its Arabian Canal project to sub-developers until market conditions improve. This is an example that many master developers - thanks to the magnitude and lengthy time scales of their projects - may increasingly choose to follow.

"Everything is ready to sell, we're just judging the best time to start selling," explains project director Ian Raine. "We haven't set a definite date yet, but obviously we need to take into account what's going on. We haven't made any changes but if conditions mean we have to react, then we will."

In summary, adaptability is the key. In the past, GCC real estate has been in such high demand that developers have been able to dictate their own terms. Now, the market is retaliating and it's those who best acclimatise to these fresh set of circumstances that will flourish.

Sherwoods' sales director, Vincent Easton, certainly agrees. "The days of buying a property in the morning and ‘flipping it' in the afternoon are gone. In response, developers will have to start re-thinking their building projects and design for the end-user market."

Easton says that an adjustment in attitude on behalf of developers will be vital in a more mature market. "Luxury high-rise penthouse apartments and deluxe villas are fine for one sector of the market but more thought has to be given to the middle and lower income brackets.

Developers need to locate and design affordable housing for people who work here and provide assistance in financing in line with salary."

Significantly, Easton does still see a bright future. "Sherwoods has been in the UAE for over 20 years and been through tough times before, including the Iran-Iraq war and the Kuwaiti crisis.

Through transparency, honesty, trust and solid professionalism, we'll not only face the challenges ahead but also increase our percentage market share."

"The environment in Dubai is still very friendly for developers," continues Slava Garin. "No taxes, flexible laws and a supportive government, it's close to ideal.

The Land Department has tried to restrict the short-term market in order to ensure the overall market and the measures are perfect, but perhaps it was a bad time to introduce them given the current crisis. Had they been brought in six months ago, the crunch would be felt even less at the moment."

A new kind of investor

So, how long will the slow down last and what, in Garin's opinion, is the wider prognosis for developers? "It's important to remember that this is global and not confined to the GCC.

There are many factors, such as the new US president, the Chinese reaction...all these things are interconnected. That said, I think it's normal for things to be a little sluggish over Christmas and winter.

We'll see things start to improve in March or April and, whereas 80 to 90% of investors in the past have been in it for short-term profits, there'll be a new generation who are attracted by the area's economic growth and advantageous market."

Adel Lootah, executive director of Dubai Property Society, is slightly less optimistic. "As the US and major European economies are facing severe slow down, it is not likely that our regional markets will escape from the effects.

However, as they have matured, regional markets have differentiated themselves from other emerging markets in the eyes of investors as being quite stable; this, of course, is essential for would-be investors choosing where to invest their money while the current global market experiences difficulties."

One thing that is certain, however, is that the balance of power has swung considerably and now unquestionably lies on the side of the end-user or long-term investor. Developers will ignore the demands of this market sector at their peril.

"With excellent opportunities available, owners and medium to long-term investors will benefit," surmises Vincent Easton. "They will definitely be more selective in their choices, demanding on the range of leisure facilities offered and in search of high quality finishing."

Quiet confidence and patience, then, is being preached. It's time to reassess and reevaluate exactly who new developments are aimed at and how best to market - and price - these.

It is, perhaps, also a time for growing up from the indulgent, reckless abandon of UAE real estate's teenage years and adopting a more considered resolution for its mid-20s. It is not, however, a time for blind panic. The room is not on fire; it's simply being redecorated.