Conversations about the current state of the real estate and equity markets in the UAE tend to ignore some basic parameters. Both about how value is created, as well as how it becomes mainstream as a tool of acceptance in society.
In Dubai, since the advent of freehold, the real estate sector has come to represent the economy in the same way as Wall Street defines the process of value creation in America. It is therefore worthwhile to examine the process of valuation, and its relation to society.
Nothing is more central to capitalism than capital itself. Property becomes capital when it is recognised as an asset, something that can generate value in the future. Valuations therefore become central to this process, as it creates order (and disorder) in markets.
Predictions about the generation of value in the future produce value in the present … and ominous predictions destroy it. Standard accounts of the freehold boom/bust model in Dubai since 2002 tend to emphasise “strong fundamentals”, low interest rates, and other such phenomena that lent themselves to an excess of “euphoria” as Kindleberger would put it.
However, these narratives fail to account for why asset values vary with such alarming volatility, or how valuation works. The process of discounting the future value of cash flow streams to some present figure ignores the social construction of value.
Prices do not rise spontaneously because competitive markets reconcile. They do so in a framework where the social value of a city interacts in a hierarchical framework that then distributes the power of pricing based on these norms.
As Keynes said famously, valuation incorporates beliefs about ‘others’’ beliefs about value. Thus the process of exchange itself generates and validates the value of an asset.
Capitalism, then, depends then on imagination — the imaginary narrative — as much as it does on the discounting of future cash flow streams. It is for these reasons that the desirability of an asset tends to dominate the valuation framework.
In Dubai, real estate has long since held that mantle, a process that accelerated with the onset of the freehold phenomena in 2002. Even within real estate, certain communities emerge by having a social dominance hierarchy over others, for reasons that have nothing to do with economics.
It is this framework that drives subsequent development. The consequential and resultant boom-bust scenarios have not displaced this imaginary narrative.
This is evidenced by the fact that the number of investors in the market — both residents and foreigners — continue to grow steadily, even as underlying values gyrate.
Real estate in Dubai, more so than stock market, has become the first “mass” ownership asset base; the universal investment that would preserve and enhance value. For the most part in the first phase of the cycle (2002-08), financial institutions watched from the sidelines, as investors thronged to the process of speculative and fundamental capital value formation.
This narrative has changed somewhat as mortgages became more readily available. Despite the current economic headwinds, the process of REIT (real estate investment trust) formation, as well as the scale and size of projects on the anvil stipulate that the trend of “financialization” is well and truly underway in Dubai.
This process of financialization is a recurring tendency in laissez faire markets. It is unnerving as it exposes the fragility of the system given the dependence it has on asset valuation movements.
However, this tendency also exhibits the strength of mass ownership; the process of wealth creation that results as the pool of investors expands. At a point in time in any society, mass investment becomes the only solution consistent with the value of progress and wealth generation.
In Dubai, real estate has embedded itself into the zeitgeist of society. It is the asset of choice for the average investor. To that extent, any subsequent construct (whether through pension fund reform and/or REIT formation) will accelerate this route of both value creation and accretion as access to this asset becomes easier.
Sameer Lakhani is Managing Director of Global Capital Partners.
