I received a number of emails regarding the stance that I have taken on the real estate sector and the need for regulation.
And also the “need” for regulating supply, which I dismissed as being overbearing.
Given the softening in the sector at present, there has been a great deal of concern that has been expressed, and curtailing supply is perhaps the “easiest” answer.
The role of the government here seems to be the easiest one to invoke. It is imperative to take a step back in these situations and derive a proper framework to comment on the issue at hand.
Let us start by looking at two industries: the energy industry and the real estate industry.
The former, for the most part, has been controlled by the government the world over, and only in the last two decades, has there been some experimentation of privatisation, with the goal of reducing costs and increasing efficiency and choice for the consumer.
The latter, has been almost completely in the hands of the private sector, with the resultant amplification in price volatility over time, not just in Dubai, but throughout the world. Here, the goal of regulation becomes to protect the small investor.
That is not however done by curtailing supply because, if that were the case, then the policy shifts from giving the best possible framework for price discovery to some other “vested” interest mechanism.
It is critical to examine the purpose behind the regulation.
Specifically, within the context of Dubai, it would be helpful to examine the growth of the freehold industry and the role the government has played in regularising the sector by making it increasingly transparent.
Notice however, that there is a trade-off between the level of regulation and the level of growth of the sector. The explosion of growth occurred in the first cycle of 2002-08, followed by a more gradual state of affairs in the 2011-18 timeline, and we appear to be headed into a period of even more gradual rates of growth and development in the next five years as developers start to adjust to a “post-off-plan funded” world.
It is here that the small investor needs to be protected, and perhaps the greatest case for regulation, which in any event is already starting to emerge on the ground, is for developers to demonstrate financial closure before they are allowed to launch a project and accept third-party monies.
This not only will give further stability to the sector and its stakeholders, but will ensure that the confidence — that ebbs and flows every time a developer is delayed in completing a project — will be cemented and strengthened.
What I am illustrating is the role of regulation that has to be clear from the outset. It is for increased efficiency, increased transparency and for the protection of the “small guy”.
That is the defining purpose of (de)regulating any industry. Whenever alternate goals are inserted into the narrative, the result is always a confused medley of actions that result in the entire process going awry.
Protection of the small investor is paramount for the future of Dubai, for it is the small investor who demonstrates confidence in channelling hard-earned savings towards productive use. Markets may fluctuate, and the price that all investors pay for this freedom, is economic insecurity over periods of time.
But capital formation over the longer term can only occur sustainably against a backdrop of regulatory stability. The role of stability is what we most often undervalue.
Yet we see how the lack of stability plays out in societies over time. Stability is as a result of numerous factors; in the legal domain it is the result of carefully thought out frameworks that, at its core, keep the interest of the small guy paramount.
Nasser Malalla Ghanem is Senior Partner at NM Associates, which has a joint venture with GCP.