Digital technologies have had a disruptive impact on the cost of intermediation in most industries - from booking flights to trading shares and bonds, or buying various types of insurance. Remarkably, they have yet to make a dent in the cost of selling a home. Commissions that real estate agents charge have actually risen over the past 20 years (in some cases to as high as 8 per cent). And despite new listing technologies that enable discount brokerages, they have remained remarkably inelastic.
In other parts of the world, there have been some arrangements where a target price is agreed upon, and anything above that is split with the broker. In about 33 per cent of transactions in the UK pre-Covid, agents agreed to a flat fee beforehand, allowing for a greater multiplicity of outcomes. However, while these practices occur in Dubai as well, typically they aggregate at the higher end of the market, where bespoke services are the norm in any event.
For the mid-market segment, given that much of the information is uploaded to online selling platforms - which quickly proliferates to other brokers who then end up indulging in the practice of ‘cold calling’ - the issue often becomes of who actually owns the data that is uploaded. Is it the seller, the platform, and/or the realtor?
In many cases, there is no dispute that is had, as sellers typically succumb to market practice, but it is clear that this will be actively debated in the months and years ahead and form part of determining the trajectory of commissions. There are a separate series of incentives that compel realtors to steer buyers towards the higher end of the commission band, which typically shows up in the primary market.
Primary commissions
Barring the ultra-high-end of the spectrum, the velocity of transactions has always tilted towards the primary market, and commissions have a role in that behavior. Secondary market transactions therefore are limited to a handful of agents for the most part, who gear up when the market becomes active as it did in the period after Covid. Even here, the dynamics of the market are determined by primary market launches, which then entices investors towards the secondary market depending on the price differential.
The Jumeiarh Village Circle, for example, has seen double-digit price and rental rises, whereas Sports City has actually seen the opposite trend, despite the latter starting out at a lower rate than the former. Commissions, which are often shared by brokers, further adds to the confusion in the market place, where some of the compensation is built into the price, a system that quickly unravels at the time of the transfer, especially when the transaction is mortgage-backed.
Data can be empowering
It is possible for the path dependence of commissions to be a lot less complicated and a lot lower in the medium-term, given the proliferation of information available online. Agents will always possess more information than potential buyers/sellers in any market, but that ‘information arbitrage’ is rapidly narrowing.
Where it cannot narrow is in the area of maintenance and upkeep required in the case of secondary market activity, especially as homes age. Curiously, this would imply that commissions should be higher for these types of transactions; yet in Dubai, the opposite has occurred, with a natural outcome that secondary market sales are systemically underpriced.
This is not true in Dubai, but throughout the world, and study after study has confirmed this hypothesis. Perhaps a radical idea would be a platform that accentuates what the Dubai Land Department has already put in the public domain, which would include any and all info that is user generated. This would be then serve as a platform for determining commission rates based on the transaction.
The data in the secondary markets would be more critical as it would have the information most relevant to potential buyers (over and above mere pricing data). This includes data gleaned from the OA and FM companies that is currently accessible. These platforms can then serve the base for driving a new commission standard.
This would have its own share of regulatory challenges to overcome, but the issue of first principles remain as self-evident now as they have ever been - commissions need to reduce.
