Perfect Storm on the horizon for GCC real estate
A perfect storm is brewing in the UAE property market thanks to a combination of oversupply of projects and softening demand due shifting market sentiment and lower oil prices, a new study shows.
Management consultants A.T. Kearney says the supply of property developments in the country is four times higher than the value of developments completed in last 10 years.
The study argues that actively probing for disruption, creating a value network and improved targeting of customer preferences is key to navigating the storm that lies ahead.
There is little evidence the real estate industry is preparing for the next market cycle. Developers need to probe for disruptive innovation beyond the traditional boundaries of their industry and beyond their known value chain, said Federico Mariscotti, Vice President at A.T. Kearney.
For example developers can find solutions which offer both cost savings and efficient construction techniques by introducing commercially viable space construction alternatives that were developed during a competition for NASA.
Among the recommendations of the study is a re-orientation from a sequential value chain toward a value network – an ecosystem with new incentives and an appetite for innovation through collaboration.
The recommendations were based on over 20 interviews with architects and contractors that indicated that the current supply chain is inherently inefficient and drains value throughout the project life-cycle, said Douglas Pickles, Director at A.T. Kearney.
This commonly accepted model leads to design changes on up to 40% of the project specs and delays of six months or longer. The future belongs to those developers who can tackle these inefficiencies by introducing innovation and increase up front collaboration within their supply chain.
With better governance and a new operating model, companies in the industry will become more resilient. The study finds that further cost efficiencies are possible with increased differentiation and focus on end-customer preferences.
As customers become more savvy, our study shows that value can be captured by having a better understanding of their preferences, said Mariscotti. By establishing a value network, developers can collaborate on designs that place the customer at the heart of the project, driving increased customization and profitability.
Advanced analytics enables an understanding of which features to customize and the trade-offs customers are willing to make and how much they will pay for them. This alone can improve the internal rate of return on investment by 10-25%, and create a pipeline of affordable housing projects, he added.
The study closes by saying these opportunities pose significant challenges as they mandate a rewriting of the way business is done. Successfully adopting them will require a new mindset, new skills and new incentives.
But according to A.T. Kearney there is hope, as other industries have shown it can happen successfully, and in the firms experience, companies most needing change are willing to make it happen. The next move is the real estate developers to make.
