A few weeks ago, we drew curtains on a disappointing 12-month period. It was a period that saw the global economy absorb the pervasive impact of the collapse of Lehmann Brothers, the US dollar slump to new lows, banks beeline for government support to shore up their capital base, and business confidence diminish across the emerging and developed world.
The gloomy sentiment reached its ebb towards the end of the year with news of restructuring at some entities, sparking off exaggerated fears of default by every major corporation this side of the Gulf – none of whom, by the way, have since announced any such plans. Even as the world was comprehending the true impact of the epoch that was, 2009 was history. For those of us in the real estate sector, though, New Year could not have come on a better note. As Burj Khalifa opened to a grand reception, drawing marvel and applause as the new icon of human aspiration, hope was reborn.
Global slowdown
Indeed, the best that can be said for 2009 is that it could have been far worse, and that 2010 will almost surely be better for most countries, if not all. Here in the Gulf, with the right policy response, we have avoided the worst. The global slowdown has taken a toll on the regional economy, not least on the real estate sector. However, the silver lining for us in Dubai is that we were able to preserve our competitive position with the potential of emerging in a position of even greater relative strength.
In order to do so, we have to put in perspective the valuable lessons learned over the last year, to reflect on them and to apply them in the way we conduct our business. Despite its challenges, the previous year has highlighted some important facts – that we probably should have known already – and lessons for the future.
This is becoming increasingly evident, here in Dubai and in the rest of the region, as the sector grapples with the full impact of a global crisis. In markets such as Singapore and Hong Kong, which witnessed real estate cycle bursts in the past, only two to three major developers survived and reinforced themselves.
Focus on fundamentals
Previous downturns have highlighted the importance of sustainable development. In large developed markets, such as United States or smaller single city economies, such as Singapore, the segments of the property sector that recovered first after a downturn and maintained the greatest value over time are those that actually met the needs of the population.
Developers in the Gulf now have the opportunity to move away from speculative investment towards projects founded upon common sense and financial fundamentals.
Again, correction in the real estate sector did not happen in isolation, and as such, the recovery must also be assessed in relation to other economic indicators.
Worldwide, companies that have survived boom and bust cycles are those that have built strong differentiated capabilities and have diversified across the value chain to stabilise sources of revenue. For developers, a key implication of new market realities is the need to consider new business models to adjust to the change in demand patterns. With the regional real estate sector having reached a tipping point, real estate companies have little option but to shift from a purely development-focused approach to a long-term investment business model.
At Deyaar, this is what we have been working towards over the past 12 months. The company is exploring various potential opportunities to diversify the range of its product offering and considering strategic expansion in countries with strong pent-up demand. Taking on debt can seem like an easy way to finance future growth, especially when the times are good and profits are soaring. But issuing debt without full consideration for future ability to repay that debt can cause a crisis down the road. Excessive liabilities threatened to nearly bring down several previously "safe bet" organisations in 2009. Limiting the leverage component of the business is clearly one of the biggest takeaways for the real estate sector from the downturn.
The next 12 months will tell us whether we have learned the lessons of this crisis any better than we should have learned the same lessons from previous crises. If we take no notice, we may well find ourselves faced with another opportunity to learn them.
- The author is Chief Executive Officer of Deyaar Development
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