Academic insight is often required to deal with practical situations. This appears relevant in the case of the property market, which is coping with a host of challenges. Who else is better-equipped to analyse the industry woes and suggest a way forward than the academic himself?
Professor Tony Key, a veteran in real estate studies, has been flying into Dubai since May this year for the Global Real Estate Market Elective at the DIFC-based Cass Business School, part of City University London. Looking at the state of affairs in the local market from the viewpoint of an international analyst, he does not isolate Dubai from the wider real estate scene. The local market, he says, is part of a bout of global property exuberance, characterised by the same ramping up of values, huge rise in leverage and questionable loan underwriting by banks that was seen in many countries.
“Dubai, given the kind of growth rates it was aiming for, and the leading role of property development in sustaining that growth, is just an extreme case of a general phenomenon,” Tony says. “More worryingly, perhaps we should consider the possibility that history suggests that periodic crises are close to an inevitable part of that growth process, that the common notion that we have ‘learnt from the last crisis’ turns out to be wrong.”
Real estate financing should be considered as the signature crisis of the last 50 years, with a strong possibility of a recurrence in the not too distant future, he warns, pointing to how China is trying to choke off a property boom triggered by high growth and loose credit control.
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Lessons to be learnt
Tony says two main lessons - one positive, the other negative - can be learnt from the past decade. “On the one hand, recent years have proved that it is possible to create a global market in property investment in less than a decade. We now have structures and skills, which for good or ill, can move investment capital across the globe in a variety of investment structures open to institutional and, increasingly, individual private investors.
“The negative lesson is that property investment is, given its risk profile, an asset that we should expect to deliver moderate returns, somewhere between equities and bonds. Chasing much higher target returns from property through development, emerging markets and high levels of leverage will, ultimately, result in disappointment and loss.”
Role of equity finance
In the case of Dubai, one of the most cited hurdles to market recovery is cash flow constraints. Generally, to pay down the bloated debt built up during the boom, there needs to be a lot of equity finance coming into the region, which puts investors with cash liquidity in the driving seat for financing new developments. “There are still a lot of cash-rich investors in the region who may have been burnt in the crash. For that reason, I believe we will see Middle Eastern investors becoming big players in large-scale developments in countries like the UK and the US, which they perceive as ‘safer’ markets,” says Tony.
So, which are the most attractive investment destinations for Gulf-based real estate investors? Tony has seen post-crisis investment by mainstream institutions in the first phase of the recovery fly towards safety and the best-quality buildings in core markets like the UK, France, Germany and the US.
He has seen prices for such trophy stock, in those markets, rise quickly, helped along by a large flow of money from the sovereign wealth funds of oil-rich and Asian countries. “I know that there are a lot of Western investors who are very keen to buy into the growth stories of Asian and Latin American markets, though they find it very hard to find the stock that would meet the investment criteria they like to set in mature markets,” he says.
However, the current mantra among investors is that they have “learnt their lesson” post-crisis so to speak, and therefore are avoiding high-risk markets and aggressive financing. “Sadly, it may also be true that this ‘lesson’ will be forgotten, perhaps a lot sooner than anyone expects,” says Tony.
By Daniel Thomas, Property magazine