In recent months, there has been a steady expression of concern expressed regarding the real estate market and the supply pipeline. Given the relative sluggish demand, there has been some comparisons made to China, where aggressive overbuilding led to the phenomenology of “ghost towns”.
A raft of cities where there simply wasn’t enough population migrating to these centres. From an African investor’s perspective, many of these concerns appear to be puzzling. It bears worth listing the critical differences that are self-evident between the two real estate development models.
Two in particular stand out.
In China, what the data indicates first and foremost is that the infrastructure boom has been primarily fuelled by debt. It was therefore an instrument of government policy to elevate aggregate demand in the economy. This is an effective mechanism for most rapidly developing economies, and to an extent, the centralised urban planning has been something that Dubai has made effective use of as well.
However, where Dubai has been different has been in the effective use of the private sector in gauging aggregate demand.
Unlike China, Dubai’s real estate model has been reliant on the influx of immigrants. A recent article in the “Economist” tabulated that the UAE had the highest increase in immigrant population in the world over the last decade and a half.
These immigrants, particularly the higher income earning members — both investors and end-users — bring in their own capital. The consequence of this is that developers in Dubai have been reliant on off-plan financing much more than they have on debt, making their balance-sheets healthier and more responsive to changes in aggregate demand.
In China, the emphasis was on migrating the population out of rural areas into urban city centres, and then carry on the progress of urbanisation so as to feed other industries. In this model, the banking system needed to be the prime “pump”, and often economic considerations were secondary to overall centralised plans for growth.
A further critical factor has been the steady evolution of the regulatory landscape in Dubai to the point where transparency on the progress of each developer’s project site, as well as a steady stream of data, makes the decision process much simpler from an investment perspective. Private sector commentary on the state of the market continue to flourish and provides a varied, but in-depth, perspective at the grass roots level.
It is an insight that is hard to match in most other real estate urbanising models in the world, including African markets.
This does not imply that Dubai has somehow become impervious to price corrections. On the contrary, Keynes’ dark forces of time and ignorance imply that the private sector is just as prone to excess as centralised planning sometimes is.
What the involvement of the private sector does ensure, however, is that there will always be an incentive to clear inventory whether it is through aggressive payment plans and/or price discounting. Where both do not work, the inevitable consequence is a slowdown in construction such that supply levels recede far quicker than in centralised state model planning economies.
Dubai has been adept at developing the price signal and embed that into the very fabric of its real estate economy. Aggregate demand may rise and fall as it invariably does throughout the world depending on the state and stage of business cycles.
The supply responses to these aggregate demand changes implies that inventory clearing means are swift, thereby reducing the probability of sustained overbuilding down to virtually zero.
Uzair Razi is Chief Investment Officer at GCP Group.