There is much I agree on when it comes to the issue of the role of government. In the new world, the issue of regulating information has become paramount, as is the need to show what “hidden incentives” exist in the market place.
This practice of mandatory disclosure is not new in global equity markets, but Dubai has led the world in regulating the real estate industry. And this would be a continuation of the theme. In a broader sense, this would be part of all regulatory goals in creating a level playing field, such that there is no informational advantage accorded to the larger players of any industry.
An independent committee theoretically could speak with one voice on issues of regulatory fair practice, especially keeping the interest of SMEs in mind, which is what lies at the heart of Dubai’s DNA of success.
The problem is always in the details. A level playing field regulation has historically failed in country after country, because of the perverse incentives it often creates. In the US, such laws were meant to tear down barriers of entry in the TV cable industry, by imposing a uniform minimum capital and service standards. It effectively did the opposite by favouring larger incumbents, who then responded aggressively reducing the cost of monthly subscription rates and effectively freezing out the competition.
Meanwhile, the entire industry was caught off-guard with the fusion of technology and telecoms leading to the rise of Netflix, which has led to the cable industry teetering on the verge of obsolescence.
In Dubai, the real estate industry has become dominated by the larger players, and who have now become shadow financiers in a bid to bolster their sales. This strategy appears to be working, and has created competition for the banking and financial services sector. No amount of regulatory oversight could have foreseen this.
Now that this practice is the norm, with the larger real estate players effectively “arbitraging” the cost of finance, do we recommend there be an oversight committee on their capital adequacy? This to me is more interesting, as it involves the potential fallout that takes place in the event of higher defaults by investors. Such contagion can then spread quickly like it did in the US financial sector in America during 2008.
Naysayers will always call for more laissez faire policies here, but we know from experience that the financial sector needs to be regulated. And these regulations need to be continuously updated as the economy gets more complex. The same should apply to companies that are effectively carrying out the same function, and today that role is being played out by developers.
Should there be a disclosure of differing incentives in the real estate market? Yes. More information disclosure is always better than less.
Should there be an oversight into the research industry and price index construction? Again the answer is probably yes. Should we have more debates about these and other topics in public domains to create a feedback loop for regulators and allow them to refine their laws on a periodic basis? Yes. But this is already happening for the most part. The impulse to (over) regulate must always be checked, especially in today’s world of breathtaking change. Too much regulation ends up stifling innovation.
The marketplace has proven to be efficient and ruthless in winnowing out unhealthy market practices for the most part. Dubai has proven to be remarkably effective in fostering competition and cooperation. The recent charter announced by His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, codifies this further and allows for nuanced regulation that keeps the playing field equal, even as it continues to foster innovation and enterprise.
Regulating information across industries is the challenge of our times. It is a formidable agenda and one where I do not possess sufficient expertise to comment on much, barring a few specifics. What I do know is that Dubai has continuously endeavoured to make the market place more transparent, and that is always a good thing.
What we do need is to stick to the fundamentals of regulation. In a world where the distinction between sectors is getting increasingly blurred, there is a need to stick to what we know best, even as we update our infrastructure to tackle new challenges.
What we do know is that we need to regulate the financial sector, and therefore I do agree that where the real estate sector — or any other for that matter — is providing credit, there needs to be some oversight.
There is always a temptation to resort to big-box macro-prudential regulation. History, however, is littered with examples of this field being littered with failure. Between caveat emptor (buyer beware) and caveat venditor (seller beware) is some happy equilibrium, and it is in the search for this balance that more debates must be conducted.
Nasser Malalla Ghanem is senior partner at NM Associates, which has a joint venture with GCP.