Payment plans are just another spoke driving the real estate wheel

Payment plans have become the new normal by which developers sell to investors and end users. Since being introduced to Dubai’s property ecosystem in 2015, they have come to dominate the market, accounting for more than 60 per cent of sales last year.

The puzzling issue has been that despite indices that continue to show falling prices, demand for real estate has actually increased, with developers reporting higher sales and profit numbers. To understand why, it is important to explain how linear thinking and analysis has been grounded in error, a statistical science that has been a hundred years old.

The problem has been that random relationships present in the ecosystem can be explained statistically as an average relationship. For example, if house prices are falling, then it is “natural” to assume demand would fall too. (This in itself being a catalyst for the fall in prices as well as symbiotic with the fall, as the feedback loop asserts itself).

Using linear regression, we can determine the elasticity of demand, income, interest rates, community preference, nationality, etc, and then average them out to produce relationships that can forecast upcoming demand and supply.

Linear thinking and measurement systems is what modern analysts thought gave them the authority. They knew the numbers, and could determine precisely, if not exactly, the number of units that needed to be built, down to the sunlight that the average human needed.

They believed if they gathered enough data points, they could solve all the averages in the system. And their recommendations and policy prescriptions would be beyond debate, a matter of scientific fact alone.

Of course, people build and live in cities for more than average reasons. There are no average households and businesses, just average measurements. In 1950, the US Air Force conducted a statistical study that proved that there was no average pilot in their service after many pilots crashed because their cockpit, having been designed to average dimensions, obstructed them.

The problem was resolved by developing an adjustable seat for the jet, but the ideology of the average has been slow to fade away.

The fact that payment plans have dominated the real estate landscape speaks to complexity models, with developers taking over the role played by banks by indulged in “cost of money arbitrage”.

They adjusted product offerings, delayed actualisation rates, come up with bespoke solutions, and in general kept the process of urbanisation vibrant, even as traditional analysis bemoaned the clear and present danger of oversupply.

Characteristic flaw

The characteristic flaw of linear regression is their namesake linearity: they only work if the input always affects the output in the same proportion. We know, however, that cities work more as neural networks, where small details matter and accumulate by an order of magnitude.

Keeping in mind these details allows for greater insights into the dynamics at play, and how cities revive themselves organically. New York, for example was left with empty warehouses, until adventurous citizens began repurposing them as workshops and condominiums.

In Dubai, for example, even as the “average” unit size has decreased, data shows that larger unit sizes are attracting the greatest amount of money flows, suggesting that end-user demand is present in the system but is not being actualised given the restrictions of the mortgage markets.

Cities that have already been through major change start with a strong advantage over those that have followed the same path. As developers adapt to the new environment of customising payment plans, the build period changes as well, and real estate as an asset class starts to mutate.

Laws are modified to incorporate for new demand (such as home offices and retail spaces that can double up as warehouses in suburban areas). The current panic over the retail “apocalypse” and the collapse in demand for suburban stores itself present an opportunity as zoning laws change to allow for different uses. Payment plans therefore, allow for both developers and investors to customise product offerings in an environment of rapid change, against the backdrop of rapid urbanisation.

Dubai has historically demonstrated resilience in the face of a host of challenges, and this time is no different. What market observers have to do is to increasingly rely on complexity of science to inform decisions that communities will make.

Investors already know that there any decision making makes no sense under any other scientific paradigm.

Sameer Lakhani is managing director of Global Capital Partners.