Property | UAE

Delinking valuations from real estate cycles

Valuations should be based on solid surmises rather than led by demand spikes

  • By Amran Al Sharhan, Special to Gulf News
  • Published: 14:29 May 9, 2013
  • Gulf News

  • Image Credit: Gulf News Archive
  • Residents stroll at Discovery gardens in Dubai

“It usually takes five or six years to recover from a downturn” — such a statement was repeatedly used by many after the Dubai property market’s decline in 2008... and they were right.

Dubai’s real estate market cycle shows strong signs of reversal for the first time since then and many stalled developments have resumed. Dubai is now gearing up for the next boom.

Confidence is building up amongst investors, and as economic and political instability spread around many parts of the world such as Europe and Arab Spring nations, Dubai has become the “safe haven city”. However, the recent “chaotic” launch of properties by one of the leading developers in Dubai reminds us that many of the conditions that led to the unsustainable speculative housing boom of 2006-2007, have returned to haunt this market.

Dubai must aggressively tackle such conditions. One of these is what can be described as “speculative valuations”.

Property valuations play a decisive role in the development of housing bubbles. Together with excess liquidity, poor regulations and monitoring of the mortgage market, speculative valuations were the third vector that led to the build-up in the years before 2008, as they served as a technical validation for the incremental rise in property prices.

After all, mortgage lenders rely heavily on valuation reports and the supposed market values they convey in order to lend money to buyers. Valuations provided the banking industry with the comfort it needed to carry on with its seemingly endless profitable business of lending money.

The problem resided in the fact that valuation companies were riding the wave of the bubble instead of putting the brakes on speculation and protecting stakeholders. The result was that valuation levels surpassed the realistic zone, ignoring the fundamentals that they should refer to. And then it burst.

From the above we can infer that professional and independent valuations are paramount for the existence of a healthy real estate sector. Valuations should only be carried out by certified professionals that hold no relation to other stakeholders, namely brokers. Appraisers should not succumb to any sort of pressure exercised by any entity to embark and assist in an inflationary move or to validate real estate investments that simply cannot be absorbed by the market.

Appraisers must be able to understand the phase of the cycle of the market and to independently adjust their valuations accordingly. One of the major drawbacks in the Dubai market is that valuations are conducted by appraisers that do not have the necessary skills or intentions to perform critical assessments.

Furthermore, in an overheated market, if appraisers are only conducting valuations using the comparative approach, they will be fuelling the bubble as speculative housing prices are the basis for new valuations. It has a snowball effect.

This is why regulations must be put into place as soon as possible, not only to ensure that only Real Estate Regulatory Agency (Rera) accredited valuers are entitled to perform valuations, but also to make sure there are clear guidelines regarding valuation approaches and required content.

Rera should also play a more active role in the surveillance of such practices and perform routine checks on accredited firms and their valuations. Moreover, appraisers and valuation firms should be considered liable and held responsible for their valuations, as they play a very important role in the whole process.

Such measures would significantly contribute to the credibility of Dubai’s real estate market and help restore more confidence and stability.

It is clear that valuation firms play a critical role in the sense that they are expected to be the independent stakeholders in the whole process of lending money. Hence it is their obligation to constantly evaluate the market — and its direction — and to blow the whistle when things are overheating.

Dubai must enforce preventive measures and regulations now that the real estate market is picking up speed. Another shock could shake the foundations. The real estate sector, as one the largest contributors to the economy, should be one of the most regulated.

 

— The writer is deputy CEO at Imovalue, a property consultancy firm.

 

 

 

 

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