Emaar’s latest results continue to show a healthy demand for its off-plan sales — and in stark contrast to the narrative that has dominated the real estate zeitgeist over the last year. And one where a sluggish secondary market is in the background of a vibrant environment for off-plan sales.
It is the very nature of this dichotomy that bears scrutinising and calls into question the supposed sentiment that the analyst community says has been prevailing.
Transactions in the secondary market, whilst rising in recent months, have been running at 20 per cent below last year’s levels, causing analysts to fret over the health of the market and suggesting that further price falls are in store.
There are a number of factors that this analysis ignores: The level of recorded transactions does not take into account the number of sales conducted in the primary market, i.e., off-plan sales.
Liquidity that is absorbed at this stage, clearly impacts the volume of secondary market deals. However, when these sales are incorporated into the transaction figures, it appears as if overall appetite has remained broadly stable, and in some cases even marginally increased when compared to the previous year.
While there are a number of reasons for this, the overwhelming factor has been that developers have been able to offer a number of price points and payment plans that finally incorporate the mid-market segment as well. This has allowed long term investors, end-users, and in some cases even speculators to enter these price point areas, thereby capitalising on levels where price appreciation is more visible, given the larger base of demand.
This has come at the expense of the secondary market, which has been, for the most part, left to end-users. Consequently the velocity of transactions has not only reduced, but it has also been accompanied with rising levels of mortgage based activity to the extent. Now, mortgages account for slightly over half the overall number of transactions conducted in the secondary market, up from 20 per cent in 2011.
Mortgages itself have risen because banks have shown greater propensity to finance real estate over the last few years. And despite concerns of the overall level of liquidity in the system, cash balances in bank balance-sheets are running well in excess of levels that were not only prevalent at the inception of the freehold, but of levels that were recorded in 2011, which marked the beginning of the second boom cycle.
Despite the above, worries abound about the catalysts that could spark a broad-based recovery this time around. Oil prices remain low, and employment conditions remain challenging, and corporate results from banks this year suggest that both loan and profit growth have been sluggish at best. This implies that there is little reason for asset prices to stage a sustained rebound in the near term.
However, such a mindset ignores perhaps the most fundamental factor at play this time around — the role of the end-user and a broadening of the market base that hitherto had not been actualised.
By broadening the offerings in terms of prices, developers have finally tapped into a market segment that was not captured earlier, by either the real estate or the banking sector for the most part. It is this inclusion that partly explains not only Emaar’s results and the relatively vibrant demand in the off-plan segment, but also the incipient price recovery that is now starting to be witnessed in the secondary market community.
End users have finally entered the fray, having observed value in some of the communities. A real estate purchase — until now been described as primarily a yield or capital gain investment was dominated by the investor community and “hot money flows” — has shown a change towards more qualitative factors that dominate end-user discourse.
These relate to access to mortgage, income, access to schools, community infrastructure, etc. This reflects not only a greater job security and visibility of income in certain segments (itself a reflection of the expansionary fiscal policy undertaken by Dubai, despite lower oil prices), but also a greater degree of confidence in calling the city home.
This was the variable that was less prominent in the first boom-bust cycle dominated by investors and capital formation at the luxury end. It is this shift, more than anything else, that — however gradual it may be — beckons a sunny landscape in the run up to 2020.
— The writer is Managing Director of Global Capital Partners.