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It's time to recognise the Yin and Yang of a downturn

By Markus Giebel

In Chinese philosophy, the concept of the Yin and Yang is used to explain how seemingly opposite forces combine together in the natural world, giving rise to each other in turn. The concept of creation occurs under the principle of Yang, while the completion of that occurrence is known as the Yin. Despite their apparently opposite and independent action, both the Yin and Yang have the potential to produce each other.

In other words, every crisis creates an opportunity.

The events in the six months leading into 2009 aptly represent the 'perfect storm' scenario of the Yin for business institutions worldwide. The real estate sector was among the worst victims of this storm, due to its intrinsic correlation with the health of the financial sector. For those of us in the region, the last six months had witnessed the emergence of a new market landscape where cash is king and uncertainty is the greatest fear.

To use another analogy, the real estate sector in the region is like a star athlete that has suddenly found himself in need of emergency medical treatment in order to keep running. The appropriate measure at this critical juncture is not to criticise the patient or blame the coach, but to apply a cure that is right for the patient to be up and running at the earliest.

A cure for a patient as important as the real estate sector requires thorough diagnosis of its ailments and the adoption of a method that will reinvigorate its strengths and help it emerge even stronger once the recovery begins.

The principal ailing factor for the sector at the moment is the prospect of an extended downturn in demand. A downturn of the magnitude that we are witnessing today calls for real estate companies to clearly understand, assess and define the real purpose of their business. If the purpose is to help customers and continue delivering excellent returns to investors and shareholders in the long term, then it is vital to develop a business model that serves this objective by sufficiently assessing external conditions and evolving market needs.

It is evident now that the real estate sector in the region has reached a tipping point, where developers have little option but to shift from a purely development-focused approach to a long-term investment business model to survive the crisis. In other words, the Yang to the current Yin lies in innovative thinking.

In times of crisis, there are several areas that offer scope for innovative thinking. Real estate companies now have the chance to seize the moment in identifying these areas and convert challenges into opportunities. The biggest challenges of a downturn scenario are to safeguard cash flows and customers. At Deyaar, the company that I run, building up a healthy cash flow is one of the cornerstones of our business model. This means keeping debt to very low levels and efficiently using balance sheet strength to invest in product and revenue diversification. To effectively use this financial strength, the company will soon launch a real estate fund that will work with a mandate of identifying and benefitting from the acquisition of distressed real estate assets, both in the UAE and the wider region.

Given current rates for prime assets in the region, it's almost impossible not to see the opportunity for a real estate fund. A fund mechanism is also ideal in these circumstances since it gives real estate companies enough capital reserve to absorb short-term defaults and separate prime assets from non-prime assets. Of course, the biggest advantage is that it provides investors and shareholders a unique opportunity to benefit from the long-term gains on these assets when the market returns to normalcy.

The other area with ample scope for innovative thinking is customer service. Customer service is often the area where companies least invest in during crises. However, it is at times like these that customers most expect real estate companies to listen actively and communicate openly with them. With credit market constraints continuing, it is imperative for companies to analyse the financial position of clients and realign payment terms to grant them greater flexibility in meeting their obligations. This is also the time to invest in better customer service facilities with a personal one-on-one approach to structuring solutions and to forge alliances with financial institutions to facilitate easier credit access for clients.

That said, now more than ever, it is critical for companies to constantly assess the feasibility of projects and allow customers to transfer ownership to projects that are likely to witness quick completion and handover so that price equilibrium is maintained in the short to medium term.

While innovative thinking can sufficiently address the short-term growth challenges, the case for the security of the property market in the medium and long term is fairly simple. Roughly one-third of the Gulf's total population is under the age of 15. The regional supply-demand dynamic is primarily informed by the need for homes, offices and retail space to meet the needs of this young, fast-growing population. It is also the reason that the region witnessed a property boom in the first place. No economic crisis can change that fact.

As in Chinese philosophy, although opposite forces, the Yin and Yang have the potential to produce each other. In other words, every crisis brings with it the potential to change to its exact opposite state. It is just a matter of recognising where the Yang to this Yin lies.

Dubai and the wider region remains an extremely vibrant and dynamic market, which has the inherent potential to deliver growth for the next several years. Once we have made the correct diagnosis and applied the appropriate cure, it is only a matter of time that this great athlete returns to winning ways. 

- The author is the CEO of Deyaar