Those in real estate have a favourite saying: “Statistics are just people with their tears wiped off”.
After all, when experts talk of the real estate market maturing, they are perhaps quick to forget that behind downward price volatility, there are real people who live and feel the impact of these changes, and lives that in many cases get upended as a result.
Maturity is of little solace for end-users who are living with this on a month-on-month basis.
It is therefore imperative to define the context under which the individual investor can frame expectations.
In real estate literature, maturity is defined under a trifecta of variables:
(1) the existence of a sophisticated regulatory framework for all market participants with standardisation of property rights and price discovery;
(2) the existence of a stable supply pipeline that is gradual and organic; and,
(3) the existence of a flexible market adjustment in both the short and long term.
When viewed under this lens, Dubai clearly has a modern architecture for regulatory practice.
Rera (Real Estate Regulatory Agency) and Dubai Land Department have been working hand in hand with all market participants towards the central goal of regulating practices and with the objective of democratisation of information.
Dubai has taken giant strides in regulating the market since 2008 and today is widely counted as being at the forefront of global cities with a mature regulatory framework.
However, this has occurred against the backdrop of a market that has more than doubled in supply in the last decade and, more importantly, is projected to double again in the next 10 years.
Amid the staggering boom of urbanisation, Dubai has unveiled community after community of increasingly higher quality standards and has integrated the city with a sophisticated network of infrastructure that is parallel to none.
Array of choice
This supply pipeline is essential as Dubai stakes its claim to perhaps being the most liveable city on earth. Equally important to note is this pipeline of supply offers both existing owners and potential investors with a dazzling array of choice of where to live and invest.
Against the backdrop of a city in continuous change, this dictates that turnover will be higher than normal as end-users and investors alike continuously appraise their alternatives. Speculators in turn enter such a dynamic marketplace to “arbitrage” away price differentials, further adding to the velocity of turnover as well as price movements.
It is important to note that with mortgage caps and higher transaction fees being imposed, “hot money” flows have subsided, but this has left a vacuum that only institutional investors can fill. It is the latter two variables that serve as the critical missing link, which in turn explains the degree of maturity differentials when global real estate markets are scrutinised.
Hence, Manhattan prices fell by approximately 15 per cent during the real estate crash of 2008, whereas prices in Miami fell by more than 55 per cent because of its dependence on foreign inflows.
Markets from Manhattan to Singapore and China have all gone through such periods of amplified price volatility and exaggerated moves in transactions on their way to market maturity. In the case of the former, individual investors that were aware of the pipeline of supply as Manhattan expanded rapidly in the first part of the last century were cognisant of such risks.
Institutional investors started entering the market place in the ensuing decades and it was a result of their entry that price volatility started to subside. This of course meant that for the patient investor, the rewards of capital gains were significant, but it did not come without periods of downside turbulence.
Three variables
More recently, China is undergoing similar downside price volatility as it copes with a supply pipeline that is still large amid a backdrop of institutions that still — for the most part — are not investing in the real estate space. Only when all three variables are met can a market start to function maturely. Until institutional investors display an appetite for real estate assets — this has started to happen with the formation of REITs (real estate investment trusts) as well as mortgages starting to play a greater role in purchases thereby reducing dependence on foreign inflows — Dubai will be in a double feedback loop of supply and demand for investment.
This necessarily implies that price volatility (although reducing on a secular basis) will amplify from time to time. In this scenario, patience is a virtue for the long term investor (even on a risk adjusted basis) because Dubai is already well on its way.
However, rewards accrue over time, and end-users need to take cognisance of this fact and accept that medium term market volatility is the price on the way towards longer term prosperity.
The writer is Managing Director of Global Capital Partners.
