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Real estate brokerage practice ripe for change

With buyers and sellers in direct access, brokers must come up with new model

Gulf News

Dubai:

Recent headlines about a prominent real estate brokerage house shuttering its doors have reignited fears about the health of the domestic market. With transactions down substantially on a year-on-year basis, concerns have been raised about the sector being “over-brokered” with rumours going around about a few more being on the verge of closure.

While this adds to the trepidation, it also exposes the ground-shifting forces in the brokerage space and trends that call for a radical rethinking of the traditional business model.

Even a cursory analysis reveals there has been a diminishing value proposition slowly creeping in for some time now. Information that was long exclusively held in the hands of the agents is now widely disseminated via online property portals.

In a random search, more than 95 per cent of the information available on property sites was available on third-party portals. In Dubai, this is particularly relevant as many communities such as International city and Discovery Gardens have standardised floor plans available on the master-developer’s website.

This — combined with a number of well-publicised instances where brokers had indulged in price gouging and/or had indulged in practices that were not legal — has left prospective buyers jaded. In response to increasing transaction costs, a number of owners have even resorted to directly selling via online platforms such as Dubizzle and other social media forums.

Surely, if it’s just about opening the doors for home viewings, this is something that does not warrant the 2 per cent (or in some cases even higher) commission rates being levied.

A potential solution already being offered is a technology system that automates price discovery with standardised documentation to both buyers and sellers. This allows for a transparent bidding process that removes broker practices that distort prices and produce suboptimal outcomes.

This could be customised to include items such as flexibility in closing transaction dates, cash versus mortgage, and availability to view properties. This then allows buyers and sellers alike to construct an optimal price point beneficial to both parties.

The reality is that if everyone has access to fast and accurate access to availability of data, market efficiency increases dramatically. To be sure, the Dubai Land Department is working on exactly such a model, by making transparent not only the average community lease and sale rates, but also individual broker run rates.

Brokers have been forced to respond by working with developers in constructing an increasingly imaginative set of payment plans, but in most cases, this has led to individual investors being ignored. In an ecosystem where lower transaction volumes will remain the norm for some time, it is imperative the individual investor has access to information and the ease of exit that is available in other developed markets.

What does this mean for the industry? More likely than not, it implies a two-tiered approach for brokers.

Traditional brokers will likely go down the route of “discount brokers” similar to the ones that have been observed in the equity markets. They will in all probability cater to the mid-ticket investor in communities where floor-plans are more uniform and will offer additional services like general research and legal advice via their online platforms at lower commission costs.

This will allow prospective buyers to access such data via the internet (similar to Zillow) and close deals with little face-to-face interaction.

The other “bespoke” model will cater to high net worth and institutional investors with customised services being offered.

In either case, it is likely an increasing amount of interaction will be conducted over online platforms. Some brokers may well cling on their brochures and time-honoured practices of individual thinking.

But as history has repeatedly shown, nostalgia is rarely a good business model, regardless of the industry. Just as Uber revolutionised the taxi industry and Airbnb altered the rules of the hotel industry by empowering the average user and lowering costs, real estate’s intermediary industry is ripe for a change. Watch this space!

—The writer is Managing Director of Global Capital Partners.

Check out  getthat.com/property  for hundreds of properties for rent and for sale in the UAE.

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