CAIRO: If he had been asked to address the same room just one year earlier, his theme would have been “how to turn sand into gold, said Sven-Olaf Vathje, managing director of the Boston Consulting Group’s Dubai offices, during a lecture at the American University in Cairo on Wednesday.
But given the events of the past six months, the Middle East-based consultant said he thought it better to focus on a slightly darker topic: the collapse of the Gulf’s real estate market.
While the Gulf property market has driven regional growth for years, a “transformation is imminent, Vathje said. Prices at Dubai’s fabled Palm Jumeirah development, for instance, have tumbled by half since September.
“It was all about building, selling it off, and moving to the next project, Vathje said of developers’ models. Now, services like facility management, property management and others “that have been somewhat disregarded for the last number of years are going to become more important to them, he said.
Three factors underlie the folding of the regional property market, Vathje, said: the loss of firms’ primary income as consumers buy less, the increased cost of financing and low commitment to developments. While the first two issues are common to the rest of the world, the third is distinctly regional, he said.
With prices falling, property buyers have an incentive to ditch their contracts and reenter the market, where they can buy similar assets at much lower prices. Due to “regulatory problems in the region, they are often able to do this, leaving many real estate firms in the lurch, Vathje said.
So, short of changing the laws, what can these companies do? First, they need to moderate their risks by managing debt and making sure funding is secure, Vathje said. Second, they should work closely with clients to manage their cash flows, reviewing their portfolios and cutting out likely defaulters. Third, they should improve their operations by training their sales force and hiring more talent. Fourth, they must manage their shareholders “strategically, to make sure their stock is not sold off in a panic.
Many problems with regional real estate firms exist because the companies do not communicate with the public, Vathje said. “We suggest being frank, being transparent, he said, as the absence of hard information allows rumor to flourish.
Following the economic downturn, the Gulf real estate market will begin to focus on sustaining, rather than just building and selling, developments, Vathje said. Developers will also begin to build more mixed-use projects, he said.
In a broader sense, the crisis is not nearing its end, Vathje said. American households still need to pay off debts of up to $6 trillion, he said. As these consumers save more and spend less, economies will inevitably slow. But while the next two years will be rough, government spending should ensure that the world does not slide into another Great Depression.
“The only thing a government can, from our perspective, do is to step in during the meantime while the consumer is not spending, he said.
Apart from low economic growth and less private spending, one offshoot of the crisis could be that countries that have de-industrialized over the past decades, such as the United Kingdom, could start to reindustrialize as they become less dependent on the global division of labor, Vathje said. Investors will also become more risk-averse and less inclined to fund highly-indebted projects, he said.
“I think managements will have learned their lessons and investors will also begin to demand lower leverage, which will lead to lower profits, Vathje said.
Banks will begin to return to their “classic role as loan intermediaries, he said. “Some bank models were all based on trading and leverage, Vathje said. “Those models have come to an end.