UAE realty learns lessons from Lehman

Regulatory regime has been entirely recast to push through investor rights

Dubai: UAE’s property market has every reason to blame Lehman Brothers for the freefall it went through in 2009 and the on-edge nature of its existence in 2010. No other sector in the local economy had to bear the direct — and immediate — consequences of the investment bank’s failure which set off the chain of events that culminated in the Great Recession.

Foreign investors who had huffed and puffed local property levels to stratospheric levels between 2005 and September 2008 made a beeline for the exit doors. Developers who it seemed were there just to announce a new project every other week found they were staring at a vacant marketplace. Genuine investors who came on board the realty show in the hope of staying for the long term found that the promise of prestige projects with celebrity neighbours was about to become a living nightmare.

For sure, UAE’s property market — and its then stakeholders — can blame it on Lehman. But a full five years down the line, it has a lot to be thankful for as well.

Maturity

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For what the fallout did was rush the UAE’s realty — and particularly Dubai’s — to a certain maturity, a status that would have taken a lot more years to achieve if the Lehman Brothers closure — or the Great Recession — had never happened.

Sure, there are those who believe that a massive correction on the lines of what the market saw in 2009-10 would still have been triggered by some spark or the other. There was no way the property values then could have been sustained for much longer.

“One effect of the financial crisis is to have accelerated the maturation rate markedly and things have definitely changed for the better,” said Mohanad Al Wadiya, managing director of Harbor Real Estate. “While speculation still does exist, the market is now comprised of a greater proportion of wary and astute buyers who are more adept at making decisions based on market fundamentals and investment logic.

“Meanwhile, those developers who survived the recession have learnt that realistic planning and demand estimation is paramount to long term profitable growth. The industry, while improving, is still showing the effects of poor planning.”

Regulatory framework

That is why the authorities are constantly at the back of developers to get their games in order, more so as transaction levels that spiked following the Arab Spring have now settled to market-sustainable levels. Attaining maturity requires that the property has a certain depth in terms of project offerings and, just as important, got the regulatory framework to go with it.

And, where possible, regulations are being put in place that would even out the playing field for investors and developers alike, which includes a recent decree by Dubai that allows investors a chance to recover funds stuck in projects that never materialised.

This in itself is a seismic change from the situation in the pre-crisis era, when the deck was heavily loaded in favour of developers and where a sales and purchase agreement was but an instrument for investors to part with their monies and no questions could be asked.

“The spate of new rulings has made it easier for valuations to be more transparent,” said Robin Teh, country manager at the property firm Chesterton. “However, until a formal Valuation Law is passed which states the do’s and don’ts and having only regulated and qualified valuation companies to practice here, this market is still a challenge in transparency.”

Precedents

As for the liquidation of defunct projects and subsequent fund recoveries, Teh added: “There are definitely precedents in other markets especially mature ones like the UK, US and Singapore to follow. There is no ideal way as each country has its own culture and bureaucracies to deal with. However, it is something that Dubai must implement and amend and improve as the market changes. I would always say that having something is better than nothing at all.”

The fact that Dubai decided to go ahead with the project liquidation move now is noteworthy. It came at a time when not many were expecting it. Plus, the market was on the upside and upscale project launches were again becoming a feature of the landscape. It would have been easy to ride on the current momentum and not let the past be a distraction.

But that Dubai issued such a decree which has investor rights at its core should be duly noted. Clearly, it is on the regulatory side that the most transparent changes are being effected within the property market. Here too a link — tenuous or direct — can be drawn between the Lehman collapse and how authorities — here and elsewhere — are trying to protect the rights of investors in their exposures to varying asset classes.

Confidence

Specific to the UAE property market, tighter regulations have been in sync with efforts to make it easier to come in — and exit — a property investment. “Regulation is improving all the time with investor protection laws and bodies being created, thereby instilling more confidence in the market and the longer term benefits are becoming more apparent,” said Helen Tatham, head of UAE residential at Knight Frank.

“The market is rising and has risen over the last 12 months to the extent that, in the majority of cases, an investor can claw back his original investment at the very least. The process of exit is simple and inexpensive compared to other countries… at this point in time it is fairly straightforward.”

The “For Sale” signs are back on and have been ever since the Arab Spring set off a trail of uncertainty in its wake. In such an environment the UAE offered certain sureties and its real estate sector was able to take full advantage.

But the marketplace does not want to see a return of speculators. Barriers are being erected that would lessen their impact.

Transaction fee

“The imposition of a sales transaction fee based on a time-dependent sliding scale should have the desired effect,” said Al Wadiya. “The transaction fee would work so that it is much more expensive for a seller to sell a property within one year [perhaps with a fee imposed by the Dubai Land Department of 15 per cent of the selling price] versus a property sold after five years [perhaps with a fee of 2 per cent of the selling price].

“This type of mechanism has been introduced in markets such as Hong Kong, Singapore and Thailand to discourage the “flipping” of properties.”

Thus, from a wider angle, the Lehman Brothers legacy has been one of positives for the UAE’s property market. Lessons were learnt so that the future investors need not be taken in by empty sales pitches from developers or estate agents. Contract clauses have to be followed by all stakeholders.

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