There is now a near consensus among market participants on two critical variables: first, the perceived overhang of supply has not been realised (as yet at least) and developers have been more responsive to price dynamics in this market cycle.
And, two, the mid-market segment remains undersupplied. In response to both these variables, perhaps the most dominant discourse during Cityscape was Emaar’s entry into the “affordable” segment.
There was also parallel commentary that master-developers were explicitly pushing back completion dates. They have stated that the dates would vary depending on investor appetite.
These variables need to be examined to ascertain the nature of the real estate terrain in the coming years.
Developers have a role to play in responding to the twin challenges of catering to existing demand as well as anticipating what the future roadmap looks like. They typically respond to peaks and troughs in the demand curve by adjusting price points as well as supply.
The latter has been manifestly evident in Dubai over the last two to three years, where supply has consistently come in below analyst estimates. In a predominantly investor-dominated market, the reduction of supply helps stem price declines, and aids investors in keeping both prices and rents relatively stable in response to sluggish demand.
As prices recover, developers respond by increasing or accelerating the supply of units, thereby smoothening out the process and achieving equilibrium. While this strategy has its own set of challenges, it perhaps ignores the dynamics that are underway in the economy.
In point of fact, it overlooks the role and demand of end-users and the impact a delay has on their budgets. During the course of the freehold phenomena, the luxury segment appeared to be the most in demand segment. The result has been a shift in supply towards this segment of the market with the consequence that it suffered the most in the current market decline. Developers responded by pushing back handover dates, but what has also transpired is a delay in the already limited supply pipeline in the mid-market as liquidity conditions turned restrictive.
This delay has had the knock-on effect of actually discouraging end-user purchases. This segment was punished by not only servicing mortgage payments for units yet to be handed over, but also in extending their current tenancy contracts they hoped would have been extinguished, and the reason for the purchase of the unit in the first place.
The delay in handovers has therefore eroded the — already fragile — trust that existed between the developers and users, and acted as a deterrent for future purchases. This has led to further delays and an endless spiral as the market gets more competitive, especially with the entry of the government-sponsored and the larger private sector developers in this space.
In the mid-income space, end-users are not only more price-sensitive, they are more sensitive to the pushback of handover dates. It has been these delays that have kept the overall supply levels subdued.
And a segment of the market that was already undersupplied to begin with has become more so. This has resulted in most of the green shoots in prices being witnessed in these areas. Paradoxically speaking, it is these green shoots that should actually trigger an increase in supply.
The entry of the larger developers promises to address the issue of chronic undersupply in coming years. However, as the market continues to transition from investor-based to an end-user-based, developers will have to be in closer fidelity to scheduled completion dates.
This is especially true for private sector developers if they are to tap into the latent demand of the resident-expatriate market. This implies that the time-honoured tradition of pushing back completion dates will have to give way somewhat.
As the visibility of supply gets clearer, it is likely that in response price movement will become less volatile — another sign of market maturity. For private sector developers, this adds to the list of challenges.
Margin erosion, increasing completion and greater regulation have combined to keep the market more responsive to the needs of end-users. However, the high order bit remains that in order to attract end-user demand, completion dates will have to become far more accurate than the norms now prevalent.
— The writer is Managing Director of Global Capital Partners.