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It is always difficult to predict the market, as they say. Yet, time and again comes a period in the cycle of asset trading where everyone seems to agree on the direction of the market.
I find these times particularly fascinating because these generally mark a few ticks on the barometer of a contrarian like me to start thinking the other direction.
When everybody is convinced, there is nobody left to convince; hence, marking the reaching of a point with not much further to travel.
For instance, when everybody is of the agreement that the market will go up, usually everyone is already in the market long asset. Although some amount of further speculation and trading could happen, essentially a tremendous amount of new money is required to keep the market going or even just stable, and for some time, to confirm everyone’s beliefs, the new money does come in, mainly from the stories of great profits being made in the market.
Similarly, when the markets are shedding value, there comes a time when everyone seems to have given up hope of any recovery. If any money is encashed, it sits at bay looking for the so-called bottom, essentially for some time drying up the liquidity from the market and further enforcing the belief that the market has still some more to correct.
The Dubai real estate market is at the level where it should be for serious own-to-rent buyers with the possibility to acquire prime properties at 6-8%rentals and non-prime properties at 8-10% yields.
Also, users who want to buy property for their own use have a clear case of buying rather than renting, but will the market now turn around to start going up again? Maybe not due to the general belief that has set in about the direction of the market which seems to be always approaching 15-20% lower than where it is.
I cannot guarantee many things in my profession; however, I am more certain than not that if at all the market was to further correct by 15%, it will not turn the consensus into now calling it the bottom. Most certainly, it will be driving us to claim a further shifting of the bottom.
So, the multimillion dollar question is: when is it time to invest?
I have a simple strategy to share. And it starts with the usual statement, “No one can know the bottom until the market has well reversed.” Trying to time the bottom is futile, instead time it out.
“Time it out” essentially means discounting the offer to buy by the expected decline estimated and in case of payment plan buying, stretching plans much beyond your expected cycle for the downward market.
For example, if you expect that the Dh2 million villa of Type X could be worth Dh1.7 million in six to eight months, make offers of Dh1.7 million on all Type X villas available. A distressed seller could sell to you much before the market corrects, or even when the market might never go beyond that point. Coupling it with the income generated during the period that you wait for the market prices to go down for that asset to the tune of 5-7% would more likely than not keep you ahead of the game.
Also, where assets are available at extended payment plans while you can enjoy the incomes should be looked at with a financial hat on. If not at all times but in some cases, they make a complete financial sense even if you make an assumption of a reasonable softening of the market.
To conclude, investment is not about following the trend, it is about knowing the risks, assuming they will materialise and you still make a decision which will make you money in adverse scenarios. This way, you make yourself a candidate for a positive surprise, time and again.
Source: Ashirwad Somani, Director, Candour Real Estate