The real estate sector will continue to take a beating due to retrenchment, unclear supply and demand equations, tight liquidity and the possibility of a credit default spiral.
But properties in good location with good infrastructure and facilities will survive, according to Ian Ohan, Regional Director – Head of Investment Transactions, at Jones Lang LaSalle Mena.
He said the sector had fallen off quickly because it had a short-term investment horizon.
"In September 2008, at the peak of real estate activity, Jones Lang LaSalle did a sentiment survey for real estate investors in the region. And we found because there was availability of finance, none of those we surveyed had an exit strategy," he said.
Ohan said this could be a good time to buy as property prices continue to dip. "It's not for the faint-hearted but there are very good deals out there," he said. "We are starting to see signs in some locations that there is a bottoming of prices already. We are starting to see evidence of a floor pricing where buyers are coming back into the market."
Besides the global slowdown due to tight credit and debt markets and the withdrawal of speculators, what factors do you think contributed to the downturn in the region's real estate market?
I have been in the region for 10 years and the phase of growth that I have seen continued until the third quarter of 2008. We had record stock market performance, record forecasts for oil prices of up to $200 per barrel and there really was a bias towards real state regardless of attempts to diversify from the sector. There had been an enormous push on infrastructure investment because there had been an enormous amount of liquidity around. There had been strong investment sentiment in the region and above all we had safety, security and sun. The region had been growing from strength to strength and this had been the backdrop of an economic boom. So 2008 was what we call a perfect storm due to strong economic investor confidence. The interesting thing was that in September 2008, the peak of real estate activity, Jones Lang LaSalle did a sentiment survey for real estate investors in the region. What we found out was that, because there was availability of finance, none of those we surveyed had an exit strategy. The reason perhaps why this region has fallen off so quickly is because it very much had a short-term investment horizon in most cases.
What are the biggest issues confronting the industry today?
The loss of jobs in the region is a big issue as it points to a reduction in demand and the regulatory environment here is being tested for the first time. It has a long way to go. The supply and demand equation here is very unclear. The key issue right now is the supply and demand balance and the impact of this downturn is not knowing the demand, because lay-offs will create a decline in demand for residential products. At the same time there are still products being delivered in the market. It is very difficult to tell when we will hit the balance point. We also have this problem called the credit default spiral.
What do you mean by the credit default spiral?
It is something that is very specific to the region and this is also causing trouble for banks. It is related to how this market has been financed in the past, which has something to do with off-plan speculative sales. Say you bought a property in the past 18 months – perhaps you may even have bought at peak and the market rates have come down and you have put down a five to 10 per cent deposit. And now you feel that it may not be in your best interests to continue with those plans or you may not be able to continue to make payments on those plans, then that spiral problem goes back to the developer. And then the developer is not able to fund the project so he is unable to sell. This cycle is something that we believe will take some time to work out as legislation in the region catches up.
How low could property prices drop?
I'd be reluctant to give a general figure because today more than ever it depends on what product and which locations you are talking about. High quality locations and products command high prices where before there was no differentiation over that. All properties across the board will be affected but properties with good facilities in good locations served by good infrastructure will survive.
Is this a good time to buy?
You have to be a sure investor. It's not for the faint-hearted but there are very good deals out there. We are starting to see signs in some locations that there is a bottoming of prices already. We are starting to see the lease markets find a bit of footing in better located products and in better quality buildings that are already in the market. We are starting to see evidence of a floor pricing where buyers are coming back into the market.
PROFILE: Ian Ohan Regional Director – Head of Investment Transactions, Jones Lang LaSalle Mena
Ohan structures and executes transactions on behalf of institutional and high-net-worth buyers and sellers and has completed deals worth more than $1 billion in the region.
He has an intimate knowledge of regional real estate markets having worked on projects across the GCC, North Africa and the Levant for the past 10 years.
He began his career with KPMG and Arthur Andersen and worked for them in North America, Dubai and Bahrain.
He also served as a senior real estate executive responsible for more than $1bn of development for a major UAE-based company.