One question that everyone has asked in recent months has been quite an obvious one: How much have the real estate markets in Dubai fallen by? A corollary to this would be — are the markets still falling?
No one seems to be able to offer a definitive answer to this basic query. Opinions vary depending on the counter-party that is being asked this. And yet everyone claims they are in possession of the holy grail when it comes to this question, with allegations flying around as to vested interests dominating the discourse when it comes to claims by others.
In a marketplace turning increasingly transparent, it is puzzling that the answer to such an obvious question has become so emotionally charged. Any discussion about benchmarks must avoid the temptation of treating the discussion of indices in a homogenous manner. There are a number of index providers in Dubai that monitor the real estate industry. Unsurprisingly, every index has been giving different readings as to the price performance.
While this is a normal function of any market, and reflects the different methodologies used to gauge performance (from price to value weighted), what is surprising is that hardly any provider has made their methodology public. When some of the index providers give clues as to how price discovery is ascertained, anomalies start to rise. Although most of the data are based on verifiable transactions, some are influenced by expert judgements, and/or real estate listings. In many instances, there is no alternative to the expert view; so there are many outliers and industry specific benchmarks. This leaves the index provider with substantial leeway to guide the data so to speak, and in the absence of regulatory oversight, gives a signal that may at times be significantly different from the prevailing underlying market dynamics. Not withstanding price discovery, the other obvious vulnerability is what is included as components of the index.
High income communities
Historically, Dubai was always known for its signature upper-income communities. Only in recent years has the pendulum shifted away and towards a relatively more balanced housing market. In the recent price cycle, it is no surprise that these communities have borne the brunt of the price declines, and consequently indices that were “overweight” with these high income communities have exaggerated the price decline in the market.
And they and have underestimated the extent of the price recovery now underway. Any index has to accomplish five major objectives : (1) the establishment of a credible governance framework; (2) benchmark quality should be such that it accurately represents the underlying market; (3) a relevant methodology should minimise the role of the “expert”; (4) it should be accountable in terms of being auditable; and (5) the overarching theme is that it should be transparent in its process. Only when all these objectives are met can conflicts of interests be removed from the ecosystem. Given the recent spate of international regulatory oversight on well-established benchmarks like Libor, it is all the more paramount that index providers in Dubai follow suit. It is not surprising that the bulk of the indices quoted have not accurately reflected the resilience, projecting declines when in fact the market has long since stabilised and even shown price rises. While not all indices are expected to show the same performance (given their different methodologies), investors have been left perplexed as to the actual state of the market.
Overhaul of benchmarks
And in many instances abandoned benchmarks in favour of their own indices. This has only added to the state of confusion in the market. Given that the vast majority of indices still portray a market that is declining (despite the fact that suburban and mid-income areas have registered year over year increases of up to 8 per cent), the discussion of an overhaul of benchmarks could not be more prescient and timely. At a time when data volumes and complexity are increasing, there is a need for tighter monitoring and control of data to meet regulatory demands for verifiable data processes. Data transparency is of the utmost importance and firms must establish a clear line of sight from when data is acquired until it is used and distributed.
It is in establishing this line of sight where regulatory oversight is needed into domestic benchmarks.
The writer is Managing Director of Global Capital Partners.