The problem with predictions

The property crash was inevitable; yet many insisted on boarding the boom-boat anyway.

In retrospect, it is easy for commentators to claim prior suspicion; but no one could honestly predict when a bust would happen, only that the degree of speculation in the market was unhealthy.

Even as promoters set up Cityscape 2008, some developers talked of launching projects at 5,000 AED per square foot only to be shocked at the reality – speculators flocked to the show to sell, not buy.

Pundits today still insist on penning predictions despite everyone’s failure to foresee the collapse. Financial institutions along with property professionals are happy to oblige that the recovery will happen: a) after summer, b) after the 3rd Quarter, c) January 2010, d) sometime in 2010, e) not before 2011, and some even as vague as f) within the next 5 years.

Over the past year we have been told that prices will drop 30%, 50% and 70%; but the question is compared to what? Projects still under construction have certainly dropped up to 70% since a year ago, but perhaps only 5% in the past month.

The dramatic headlines don’t help tell the true story; and statistically significant transactional data eludes the best experts.

Advertised rates do show a decline but not its depth. For example, Discovery Gardens units listed at an average AED 692 per square foot in the first quarter of this year; but by May/June offered rates were 598/sq ft.

Property in the Dubai Marina went for an average AED 1,373 in Q1, down to 1,237 in the past two months. This time last year the rate was about 2,200/ sq ft. The upper end of the market has remained flat this year at an average offered rate of AED 1,700 in Downtown Burj Dubai (calculated after removing 2 abnormal 7,000/sq ft offers).

The transaction story is different, and therein lies the crux – no one knows how much of the market is “distressed,” the common synonym used to describe desperate sellers. Out of 70 units in the Dubai Marina monitored in May, for example, only 9 (13%) were advertised at 880/sqft or below.

And 5 of those were in just one building the owner of which had to sell urgently at any cost (and reportedly sold at 25% below the advertised rate). The same reality is true of a handful of individual owners who, for whatever personal financial anxiety, want to cut their losses or settle debts; and hence willing to let go of their investment at below their purchase rate.

There are developers too who will offer discounted units for cash. While some, especially those with only a few buildings, may indeed be anxious enough to sell at or below cost, there are others with many projects who may focus more on consolidation and limited units at discount to manage cash flow.

A building owner will logically compromise for cash; but will not concede as much on price if buyers opt for pushing balance payments to completion or structuring payments over installments after taking the keys of finished units.

The property market is currently working the same pricing strategy as the clothing business, but in reverse. Retail outlets often buy shipments at a bulk value. Then they charge premium rates for the apparel until the cost of goods plus profit is covered.

Then you and I see a sale at 50% or 75% off, because it no longer matters at what rate the garments are sold since getting rid of them is more cost effective than storing or disposing of them.

The same principle is in play with property owners; but the discounts are up front rather than after costs are recouped. Which is why no one can predict when the market will bounce back – the market is based on opportunism rather than supply and demand.

It is sadly human nature to find comfort in the failures of others, otherwise tabloids wouldn’t be popular. Yet the negative forecasting and sensationalist headlines are becoming a self-fulfilling prophecy, one that impacts the economy as a whole.

The authors of the banks’ or media’s reports are neither insidious nor ill-intentioned; yet they are speculating just as badly as the buyers who drove up prices to unsustainable levels in the first place.

The truth of the matter is the entire economy is reeling, not just real estate: Automotive dealers are drowning in inventory, healthcare clinics worry about patients self-medicating, and shops have seen a decline in trade.

But, equally, there are 2009 models stuck in traffic jams that defy reports of an expat exodus; private hospitals still tend to plenty of sick people; and there are still copious numbers of shopping bags moving from malls to the backs of cars in overcrowded lots.

That these are frustrating, worrying times is obvious. But we must temper forecasts that are too positive or negative because we simply have not lived through anything like this in our lifetimes.

The scale of the financial disaster will only subside when governments inject the economy with liquidity in the form of infrastructure funding and credit; but authorities too need to figure out where to get the money before doing so – be it in exports, bonds, sovereign funds, taxes, etc.

And even when those in leadership do infuse the market, as with any complex surgery, we’ll all have to wait and see if the body goes into remission or rejects the procedure; and if it does, try something new.

That is how America emerged from its Depression; and that spirit of perseverance is one, if nothing else, we can emulate.

Ahmad Abuljobain is the COO of a property brokerage. He was previously Chief Marketing Officer of Tameer and Managing Director of Leo Burnett, Riyadh.

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READERS' COMMENTS

Nice Write-up
Posted by Shehzad, Dubai, UAE on Tuesday 7 July 2009 at 14:52 UAE time


The article makes real sease to an extent. the author has made a very good observation about the Distress Sales and the price movement. Most importantly the major differentiator from america to dubai is the policies. Dubai has to work out on the policies in much better way than what it is today. One day dubai will have to offer green cards and passports to expats. In today's market conditions, i see this happening very soon if government starts thinking positive about the expat poppulation.

The Solution
Posted by Ahmed Rashad on Monday 6 July 2009 at 10:27 UAE time


mm, I don't want to be rude, but I think you missed the point. The author said that the Americans came up with solutions then tried them. if they failed, they tried something else without giving up. It's not about specific economic dynamics of Dubai or America, this is just a state of mind that applies to people all over the world.

The Solution
Posted by mm, Abu Dhabi, UAE on Monday 6 July 2009 at 08:05 UAE time


The Solution : "That is how America emerged from its Depression" Are the dynamics of economy for Dubai are the same as that of America?

Never make predictions, especially about the future
Posted by Sam Goldwyn, Hollywood, California on Monday 6 July 2009 at 07:43 UAE time


Finally some sense about Dubai property!

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