“Like being chained to a corpse isn’t it?” ...
This remark was offered to John Bayley by a fellow sufferer in a loveless marriage.
Similar comments have been offered in recent years throughout the world when it comes to the question of real estate commissions.
Unlike equity and fixed income capital markets, where intermediary fees have gone down to virtually zero, the real estate broker still demands a hefty percentage.
Even though the internet has disrupted the way in which people search for houses (more than 50 per cent found their houses online in 2019), still 85 per cent ended up retaining the services of an agent.
Take them out of the equation
This model, appears to be on the cusp of change. Billions of dollars have been poured into start-ups that offer sellers prices for their properties, sight unseen, which allows them to skip the process of MLS (multiple listing services) altogether. Crowd funding sites have also propped up, allowing investors to buy shares of a dwelling, thereby reducing the cost of acquisition and, by extension, the cost of the transaction.
Private listing sites have also cropped up, allowing for a “closed system” bidding war to take place, cutting out most of the market. What has emerged is a host of well-capitalised tech fiefdoms with access to data that is not widely available, thereby cutting off access to the entire market, and allowing the cost of the transaction to reduce.
What scenarists would call the “back story” is indeed one that needs a refresher. Intermediaries provide an invaluable service by offering both access to liquidity for the seller as well bridging the “information asymmetry” gap that exists with potential buyers.
The internet has to a large extent addressed the gap of information asymmetry, which implies that commissions and transaction costs should fall. Yet they haven’t. in a market largely driven by off-plan sales (which has historically been the case in Dubai), developers need intermediaries to spread their net wide enough in order to entice potential buyers from far and wide.
Tech drives down fees
However, in an environment where prices have been sluggish, and liquidity has been constrained, technology companies, along with financing schemes (where regulation allows for it) have driven down payments and instalments lower. Commissions, for the most part, have been baked into the price, and they have not moved much. While “flat fee” services do not work economically, it is apparent that transaction costs need to reduce, while still allowing for information to be as widely disseminated as possible so as to not perpetuate these high capitalised “fiefdoms” that have come to dominate other parts of the internet ecosystem.
To argue that the high commission structures are justified would be an “insult to the brain”. The challenge is particularly acute as buyers and sellers scramble to get the best deal in an increasingly competitive and fragmented market where no two properties are alike, unlike the homogenous nature of the equity capital markets.
The heterogenous nature of the real estate industry has been the historical justification for charging higher transaction costs, but in today’s world, that argument wears thin.
Maritimers often talk of a turn in the tide as the moment when the waves “reconsider”. Over and above its piercing juxtapositions of youth and age, the real estate industry has an oceanic feel, largely unchanging even as underlying currents below the surface warn of an impending turn of the tide.
It’s already happening elsewhere
The real estate intermediation industry is now at this moment, where “proptech” experiments threaten to upend the entire structure of the market. In the West, companies such as Open Door and Zillow have already jumped on the bandwagon by acquiring thousands of properties through algorithmic based models, providing both a hassle-free experience as well as liquidity to the seller.
The process of buying and selling homes has always been documented as a stressful one. For this to reduce, especially as the market structure in Dubai moves towards secondary market sales, downward pressure on transaction costs is likely the first step towards infusing interest — and therefore liquidity — into the market place and making the process of buying and selling desirable again.
Whilst this would accelerate the consolidation of the intermediary industry that is already underway, the key challenge (especially as Dubai marches towards achieving its “Smart City” challenge) would remain to have the data of listings as widely disseminated as possible, thereby allowing the smaller niche providers to coexist alongside the larger franchised players in the ecosystem.
— Sameer Lakhani is Managing Director at Global Capital Partners.