Investment and confidence … one follows the other

Confidence is a dicey concept when it comes to markets. It is essentially a state of mind, a perception not always based on hard facts.
Data and charts are only marginally effective if confidence is not part of the equation.
Right now, Dubai's property market is all about confidence, or more specifically the lack of it. As I talk to people in the industry, the confidence gap is the one issue I hear over and over again.
From the British pensioner contemplating a second home to the institutional investor looking for a place to park millions of dollars, they have little confidence that the system will support their interests.
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This is a troubling situation for the industry and it requires strong steps to reverse the trend. Confidence is an elusive element and once wariness is entrenched in the business community, it could take years to remove it.
Sooner or later Dubai's property agencies and courts are going to have to make a bold move to demonstrate a willingness to support buyers over developers.
The framework is now in place to make it happen. In the past two years Dubai has taken giant steps to set up a regulatory system and transparency for its international property market, which is still in its infancy.
The creation of the Real Estate Regulatory Authority (Rera) and development of laws designed to give investors standing in the courts were positive steps. They highlighted a government that is trying to respond to complaints. It can be argued Dubai is now one of the most transparent markets in the region.
But it's not working in the realm of public opinion. The financial community still views the system as weighted towards developers, whether true or not.
The impact of the confidence gap is growing more acute as the global financial crisis starts to ease.
At this point, prices are not the best barometer of the state of the market; it's the number of transactions. When buyers feel a market is stable and reliable, sales numbers will start to rise.
Last year the number of residential transactions in Dubai dropped 53 per cent compared with 2009, according to data from Jones Lang LaSalle. Off-plan sales, a true measure of confidence, have almost completely disappeared from the market.
Soon Dubai's property industry will no longer be able to use the global financial turmoil as an excuse. Prices are already starting to return to reasonable levels, even if analysts believe the bottom may still be a year or two away.
With prices 50 per cent or more below peak levels and several quality developments hitting the market, buyers and investors once again see Dubai as an attractive option. Even lenders are returning, sensing that stability is real.
But the retiree reading the horror stories, or the institutional investor representing wary shareholders, is not going to commit to the market until they have faith in their ability to get their money out in a timely fashion if necessary.
Turning the tide will take strong, loud, public action to demonstrate that protecting investors is truly a top priority. In a young market, it's time to set precedent. Dubai's leaders have shown they understand the issues; now they need to put action behind the system.
That action could come in the form of the courts forcing developers to honour their contracts with buyers. Developers are using a variety of gimmicks to avoid paying penalties or offering refunds, including the use of the force majeure clause, which is usually reserved for natural disasters such as earthquakes and volcanic eruptions.
Courts have been set up to handle property complaints but it is still seen as time-consuming and prohibitively expensive to pursue actions. The system needs to be streamlined to expedite claims and the rules changed to allow joint actions, giving buyers in large developments a chance to state their case as a group.
The neophyte Rera, which is still finding its legs, is a perfect forum to protect investors. But Rera often sounds more like a booster for the market, instead of the agency charged with protecting buyers.
To boost investor numbers, Rera needs to take a more aggressive and public stance to cancel long-stalled projects, forcing developers to return deposits that have in some cases been sitting in banks for years.
Rera is also implementing Dubai's fledgling Strata Law, which gives a wide variety of rights to homeowners in jointly owned buildings. Forming homeowner's association and establishing laws to protect their rights was a huge leap forward in convincing foreign buyers their interests will be protected.
But now those laws need to be enforced and developers held accountable if they don't follow the rules.
Taking these steps in a public forum, showing the world that there is bite to the emirate's new regulations, will go a long way towards closing the confidence gap.
 
kbrass@thenational.ae