In his famous play “Satire”, Juvenal asked the question that has been one for the ages: Quis custodies ipsos customs? (who shall watch the watchkeepers?). A recent working paper from the University of Chicago joins a tonne of literature looking at analyst forecasts and how accurate it has been over market cycles.
It essentially concludes that the accuracy of such forecasts has been significantly less accurate than tossing a coin. When Dubai’’s real estate market is examined under the same critical lens, essentially the same results are arrived at. And it is this examination that provides the greatest insight for investors towards constructing their portfolios.
Amid all the gloom on the outlook of real estate for 2016, it is critical to note that underlying data is actually starting to show the beginnings of an uptick, both in terms of transactional values as well as in prices following a levelling off in the fourth quarter of 2015. Most research indicates that rising transactional volumes are a leading indicator for prices to follow suit, a core relationship that has held up not only in Dubai’s real estate market, but throughout the world over the last 30 years.
Yet pundits continue to preach pessimism, listing off a litany of potential downfalls, such as a generous pipeline of supply, and macro indicators such as declining oil prices to lend credibility to their forecasts. They essentially ignore the underlying end-user demand that has started to increase.
To be sure, these headwinds have played a factor in the bear market cycle that started in late 2013, and led to a two-tier market developing in the city. The high-end follows a different trajectory of price action than the mid-end.
In most of the latter areas (such as Sports City, JVC, IMPZ, and Emirates Living), transactions recorded an increase of between 10-30 per cent, not only in the fourth quarter of 2015, but even on a rolling three-month basis ending January 2016 on a year-over-year basis, even as high-income areas such as Downtown, Dubai Marina, and Palm Jumeirah continue to exhibit both transactional and price declines.
Developers have finally started to respond with select mid-income offerings, and where they have, they have had a heartening response. This shape shifting change of the demand curve is the strongest indicator yet of the transformation of the market towards an end user dominated one, an arc that will likely play out over the next decade.
It is astonishing that for the most part, pundits have failed to take cognisance of these changes, and instead have been focusing on macro forecasts, underlying their negative forecasts, when in fact, they did not see the price correction that began in late 2013. At that point, data shows, the majority of the analyst community continued with their forecasts of expected price rises until the second half of 2014.
Only after the market had fallen by more than 12-15 per cent did their forecasts start to change, illustrating not only the problem of insufficient weightage given to basic valuation criteria, but also in the underlying methodology of the analysis itself.
Even as valuation criteria had flashed warning signals in the real estate market as late as mid-2007, the analyst community extolled bullish forecasts for their future outlook, with hardly any warning of a correction that looked inevitable as prices continued to rise. This indicates that for the most part, the analyst community is as prone to the herd mentality that they themselves warn investors against.
One swan does not a summer make, the same analyst protests now. The recent uptick in transaction volumes and prices may well be a blip in the overall bear market curve. But it is worthwhile to note that this price rise if sustained is illustrative of the paucity of supply at the mid-end of the market (yet another factor that research failed to highlight till mid 2014).
And for the most part, the emergence of the two-tier market has been in response to not only developers chasing higher margins and therefore saturating the higher end of the market, but also that as prices fell, fundamentals started to reassert themselves on the price end of the equation.
A base effect of the market may well take a few months to establish themselves, but data is starting to indicate that buying interest is increasing (in select communities at select price points). It is the nature of this demand that reveals the structural transformation that is already underway in the marketplace.
Warren Buffett said it best when he wrote “Be Greedy when others are fearful, and be fearful when others are greedy”. The construction of a portfolio is based on a simple criteria of valuation. Surely, if prices are attractive in early 2014, then they are likely to be more attractive when the market has corrected by 25 per cent.
Dubai’s underlying fundamentals remain stronger than ever, and it is this acknowledgement along with a continued emphasis on valuation criteria that is likely to serve investors well.
The writer is Managing Director of Global Capital Partners.