Why is finance so important to economic growth?
The answer, according to Frederic Mishkin is that it functions as a coordinating mechanism that allocates capital to building factories, houses and roads, functioning as the brain of the economy.
No work ethic can compensate for misallocation of capital, and when that happens, price dislocations eventually occur. It is no surprise that despite the generous incentives offered in the Dubai offplan sector – 8-year post-handover plans with 0.5% monthly payments, even in prime luxury communities where supposedly cash is king - some research houses are starting to show data that indicate a price softening.
Leaving aside the offplan, the ready property segment has shown some interesting distortions too. We are well aware of the impact that views have on prices in the real estate domain.
Isolating for that dynamic in areas like Downtown and Palm Jumeriah reveals that the median difference between premium and standard views is as high as 40%. However, here too, there are anomalies that begin to show up.
At some of the shoreline buildings on the palm, as well as some of the older buildings in Downtown Dubai, we have seen instances where apartments with standard views have recorded prices that have been consistently higher than that of the premium - seaside or Burj Khalifa - ones.
A makeover bonanza
The answer lies in the upkeep of such apartments. As buildings get older, the frequency to upgrade has become an industry in it of itself.
Homeowners with standard views have been quicker (by a factor of more than 2.5x) to upgrade than their contemporaries with premium views. The resultant data shows that prices with non-premium views have outperformed significantly.
This has created a price dislocation in the ready markets, let alone in offplan, where standard views in many cases trade at a 25% premium. And an opportunity for investors to arbitrage some of these discrepancies away.
Of course, the other variable that has been operational is the tilt towards the mid-market segment, where size takes a preference to anything else. In offplan segment, sizes have fallen to a record low, indicating that developers are getting this dynamic wrong.
Indeed, when isolating for the size variable, there is a considerable premium that buyers are willing to pay even in the midmarket segment (by as much as 25%) in areas ranging from Jumeirah Village to Dubai South, from Dubai Silicon Oasis to Al Furjan.
Developers, eager to offload their inventory, have operated on the impulse to reduce sizes. In many cases, they are now starting to see sluggish collections. All of this is getting lost in the headline-grabbing data of record sales with offplan dominating month after month. But this is a tale where there will almost certainly be a combination of unsold inventory combined with a shift towards older, larger units in the mid-market space. (That definition too needs to be reexamined given the increase in prices.)
Older buildings are a draw
Bargain hunters in the ready space are looking for older buildings with larger sizes and greater room for refurbishment, where the net present value ends up higher than any of the offplan on offer.
If this sounds like a stark and unduly dour summary, it is only because beneath the headline-grabbing offplan data, there is a multitude of factors pointing to buyers reallocating their positions towards capitalizing on such emerging trends.
In many cases, buyers have been left astonished with the dearth of expertise that most brokers have demonstrated in the secondary markets. Such as been the scale of incentives offered on offplan.
Given the softening showing up in the data, and the fact that most potential home buyers are well aware of the incentives that brokers receive - despite the fact that in most cases end up paying out the majority to their customers - there is an imminent pivot underway.
Size as well as a lack of refurbishment will be the factors at play that will come to the fore as the markets become more affordable.
‘Follow the money’ has been the time-tested adage in capital markets. In real estate that money seems to be moving (to paraphrase Mishkin again) towards ‘brain dominating brawn’.
