Dubai property: Investors will do well to save up to cash in on next chance

The latest Fitch report on Dubai property talks about certain speculative projects and developers, analyzes the situation on oversupply, and yet also states that banks and developers for the most part are well capitalized to weather any price correction.

This flies in the face of the traditional heuristics that people apply when they state phrases such as ‘cash is trash’ or ‘buy the dip’. Clearly, cash is needed to capitalize on any prospects of asset defaults, in order to capitalize on such opportunities. Yet any portfolio that is fully invested and buys into any dip will not be able to take advantage of such scenarios.

This implies that any sort of first principles approach by definition means that an individual’s balance-sheet should not only have some cash (and more importantly cash flow) but that this cash pile should increase when there is a sense of price inflation.

Otherwise, the inherent assumption is that prices would rise all the time, and there would be no concept of a price bubble. Yet, we have experiences from the world (Japan, China and US real estate are the most prominent examples) that when prices get detached from fundamentals - which occurs due to oversupply pipelines as well as stretched balance-sheets - prices fall.

Even the data points fail to accurately reflect inflection points. For example, refurbishment costs are not factored into the gains reported but are substantial in nature. A common sense analysis states clearly that there are no 8%-10% rent yields on residential assets anymore, despite the guarantees being offered by certain developers.

Real estate investing, unlike capital markets, by definition involves stock selection. And yet even as every decision is made to add or subtract from the portfolio, the underlying criteria has to be some sense of where asset prices should be.

This is not an exact science, but as we see developer launches being pushed back, and more aggressive discounts offered in some of these ‘speculative projects’. (A quick supply pipeline analysis indicates that this is another way of saying that the market has gravitated to the luxury end of the spectrum in terms of supply and ticket prices.)

It is also another way of saying that buyers need to possess the cash in order to capitalize on these opportunities if indeed they are. In the US, the office market - in sharp contrast to the UAE office market - indicates the toxic combination of oversupply and stretched balance-sheets.

The same effects are starting to be felt in the US residential too in some states, particularly in the luxury markets. Why then is not obvious that the supply pipeline is a key barometer, dissected by category, size, views and other factors?

Investing is about patience rather than clichés. It’s about waiting for long periods of time to find the right opportunity but to be aggressive when that opportunity does come along. This can only be actionable if there is cash on hand to begin with.

This is as obvious a heuristic as the oversupply variable, and yet all too often, gets lost under the guise of jargon. Where every new launch is treated with the same level of breathtaking wonder as the last.

To be sure, there is no taking the marketing away and the lines do get blurry when the decision is being made to purchase one’s own residence where emotions often take over.

Yet in investor-dominated markets, just as in business, there always needs to be cash on the table, for that is the only way to capitalize on asset mis-pricings.

Looked from that perspective, for the thinking investor, rising cash piles is necessary prerequisite for long-term success the more prices rise. Investors would do well to look at the Fitch report from that lens.