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It's not unusual for the major players in any industry to consider vertical integration. For some, it may provide benefits, for others, it may be a costly and regrettable experiment.
The reasons why (local) developers may integrate a sales function are usually centred around controlling certain determinants of the success of the revenue generation phase of their projects. These determinants would include product pricing, financing, margin protection and the costs directly attributable. By appointing an independent broker to handle the sales function, these costs would typically comprise of commission on sales and, maybe, an administration fee.
From a commercial point of view, assembling a sales function within the organisation as compared to seeking competitive bids from established brokerages in the market may appear to make sense. After all, the perceived heightened level of control can provide a sense of security and comfort for management, notwithstanding the increased cost burden of bringing such a function in-house.
Costs such as recruitment fees, salaries, training expenses, office space and general administrative overheads can be substantial and well in excess of what the developer may pay an independent broker to perform the same function.
Nevertheless, while such actions are inevitable, the effect on pure brokerage firms is likely to be minimal. For a start there are two sides to every transaction and buyers are not always comfortable with dealing directly with a developer's sales agent.
Prevailing market conditions
Many will seek representation from an independent broker as, apart from deciphering any dubious claims in a sales pitch, the independent broker will always be able to provide alternatives which help the buyer evaluate the developer's offering in the light of the prevailing market conditions. This is one of the important benefits of buyers appointing brokers to assist in their purchase.
Then there is the market itself. As the Dubai market has grown, the level of sales activity that is generated in the secondary market has steadily increased to a level that it now dominates the industry.
This is typical of a market that is performing well. Whether people are capitalising on investments, upgrading the family abode, arriving or leaving the emirate or seeking superior investment returns, a strong economy - and property industry — will always foster a healthy secondary market. While new developments will make headlines, typically the sales activity associated with these new developments, as a proportion of the overall sales activity in the market place is relatively small.
No doubt it will fluctuate in accordance with the cyclical idiosyncrasies of the market, but Dubai, from a sales activity point of view, will always have a strong and vibrant secondary market.
Recent history has shown that those brokerage companies that stand out because they are providing innovative client solutions, regardless of whether the client is a developer or individual investor will thrive. Having retained and developed talented people, they can deliver their services consistent with an ethos of professionalism, ethics and customer centricity.
Clients have and will continue to recognise the benefits of seeking their assistance.
Click on Dubai and read why it remains an exciting investment destination
Source: Mohanad Alwadiya, Special to gulfnews.com
The writer is Managing Director of Harbor Real Estate