The surrealist painter Magritte commented that seeing comes before words. We observe before we can explain the world with words; but the relation between what we see and what we know is never settled.
This is perhaps the most poignant preamble in beginning to describe the dynamics in the UAE real estate sector.
In response to the surge in demand for luxury housing, private sector developers’ strategies have pivoted. Earlier, the price housing landscape in Dubai was largely explained by private sector developer prices coming in below the offers set by Emaar, Nakheel, Meraas and Dubai Properties. Recently, however, this has changed to developers, earlier known for offering ‘bargain prices’, going the other way and offering branded lifestyles. (Recent results from larger developers do not reflect the underlying rise in prices, as their portfolio of projects were not historically skewed towards this ultra-prime segment).
This, of course, is part of the gentrification process neighborhoods go through, as part of the area’s regeneration. An essential problem with the demand for luxury housing is that unlike the majority of the housing stock (which can be modeled based on stats such as population and per capita income growth), luxury housing can never be truly modeled for. It is a function of Vebler’s conspicuous consumption paradigm set.
Sub-market dynamics
One critical factor for luxury housing demand stems from scarcity; another from the mobility of capital movement, and the third is the aspirational lifestyle it offers. None of these variables can be accurately measured, and consequently leads to three outcomes: 1) as the gap between the new-builds and secondary markets start to increase, the newer stock sits on the market for longer; 2) supply statistics gets skewed as anticipated supply of newer units do not materialize as expected given the lower demand offtake; and 3) price indices that measure market movements get skewed towards higher ticket items. And get increasingly divorced from the underlying realities on the ground.
All of these are now being reported by analyst reports making their way through the media. What is being ignored is the fact that the ‘hockey stick’ phenomena seen in prices is largely driven by demand from a demographic buying their second, third or even fourth residences. While the mid-income space is seeing the same hockey stick phenomena with rentals rather than prices (for the most part). And older stock for the most part being the only segment (in residential as well In office space) that offers affordable alternatives (some 20-30 per cent of which needs to be refurbished/replaced).
Capitalize on mid-market
That reality is dominated by the inflationary forces making its effects felt, as mid-market households move further away from the city center in response to rising rentals. Meanwhile, the core problem of affordable housing (which is where the opportunity is) remains ignored with the consequence that a granular analysis of some mid-income areas in certain communities show prices have risen in certain cases by even more than their luxury counterparts as end-users (and in some cases investors) attempt to capitalize on the shortage of well managed buildings that can still cater to the mid-income sector.
Development strategies have to be long-term in nature, given the lead time that is necessary for a project to get built. The predominant analyst narrative from 2015-20 was one of oversupply. That has been as factually incorrect as the current narrative, which is one of undersupply. The underlying data shows a far more nuanced picture, where pockets of undersupply remain at price points where the opportunity has been the most ignored. And potential oversupply building in areas where the demand cannot be forecast.
Luxury doesn’t sell all the time
Inflation is here for all to see when earlier it was not. But we have seen periods of inflation before, and we have witnessed how luxury reacts to it, especially in this cycle where housing markets in America have shown that in the top quntile of the market, sales have fallen by more than 25 per cent in the last year compared to 11 per cent for the median.
To go back to Magritte, the way we see things is shaped by what we believe. To look is an act of choice, but investors have to see it. Those that have and do are the ones that benefit and possibly escape ‘the madness of crowds’.
