After the euphoric off-plan performance in 2017, the press and pundits are starting to overdose on the scepticism. The bust likes to think of itself as a radical departure from the boom — but it has one critical thing in common with it: herd mentality.
When off-plan sales were soaring, it was rare to hear a word against the system. Now that sales are falling, it is rare to hear a word for the system, and everyone is a critic. The same herd instinct that fuelled the boom fuels the bust.
However, these busts create market distortions that are as bizarre as those seen in the boom. For the watchful, they lead to opportunity; for the rest, it serves as a dose of righteous indignation from which to feed on.
The post-handover payment plans and the return guarantees that were in vogue served as a way for developers to raise money at rates that, at least initially, would end up to be less expensive than what would be imposed on them in an environment of rising interest rates. In this context, big and small developers alike, launched scheme after scheme to attract capital from the investing public.
Investors responded in droves as off-plan sales accounted for nearly three-fourths of all transactions conducted in 2017. No one thought to comment on the fact that this was clearly an unsustainable trend.
Indeed the naysayers were conspicuously absent, instead choosing to focus on the luxury end of the spectrum and on falling rents, when all the while, it was obvious that capital was being created and spent on the development end of the spectrum.
Today, listening to the commentary, it appears as if developers were feeding on an incredulous public, when all they did was to expand as fast as they could because the market threw capital at them. What distinguishes a market economy of Dubai is that it encourages young, ambitious people to take risks and that they respond to that encouragement.
It encourages nerve, and that is a beautiful thing. The personality that creates the entrepreneur in the first place does not have a shut-off valve. If it did, most of the smaller developers — the same could be said for much of the SME sector in Dubai — would not exist.
Back in the early days of the freehold boom and a pattern that repeated itself in 2012-16), there was plenty of talk of the creativity that was unleashed by new developers, whether it was through payment plans or radical designs. The same analysts who praised the financial innovation of post-handover payment plans now decry it as a symptom of financial speculation.
But when analysts turn on the tap of scepticism, it’s not the giants in the industry that suffer; those that really suffer are the ones that need urgent capital.
The capital markets are a game of crack the whip: the gentle curve experienced by the big guy at the front is felt by the little guy in the rear as a back-snapping hairpin turn. That more than anything else is the curious thing about the current environment.
As much as it is a reaction against any financial or speculative excess, what is really transpiring — as the data clearly shows — is a backlash against the excessive opportunity that was available. The media may celebrate the consolidation wave, but what it is really is a game of capital — who gets what and on what terms.
When the little guy does not get the capital, it is the big guy that benefits.
Regardless of market conditions, the system elevates the desire to make money over other pursuits. It is this variable that is at odds with the remarkable creativity and energy that we have seen in the economy. And when the financial and economic intelligentsia breathe fire as they are doing now, the obvious question is what are these people doing, except behaving as cheerleaders on the sidelines?
This, more so than any other dynamic, is the clarion call for regulating real estate analysis, The need to protect the small developer is as pressing as it is to protect the small investor.
The writer is Managing Director at Global Capital Partners.