Since the beginning of the year, Dubai has been stepping up its efforts to revive its property market, as the Emirate seeks to get a grip on a sector which has seen prices plummet 40% from their 2014 peak. The services and tourism-based economy has suffered from the fallout caused by that year’s oil price collapse and recently escalating geopolitical tensions - just as real estate supply in the likes of offices, hotels and apartments were skyrocketing.
As prices have continued to decline, and late-paying developers have been mounting pressure on cash-strapped contractors, Dubai’s authorities have struggled to know how best to approach a market that has an outsized impact on sentiment. In addition to forming a committee to balance supply and demand, the government has turned to two of its most senior officials to take over ailing state-owned companies.
In light of these conditions there have even been suggestions recently for a temporary ban in real estate residential construction. The purpose would not only be to counter the decline in asset prices (despite mounting evidence that these may have already bottomed out), but also to balance demand and supply and minimise the burden of diminishing cashflows for existing developers.
However, what has become increasingly visible in recent weeks is that the dip is being taken advantage of by some individuals, hoping to exacerbate perceptions of decline to buy on the cheap.
Emirates REIT, the largest real estate investment trust in the GCC, last week contacted its investors concerning a suspected smear campaign designed to push their stock price down. In a statement the company published to its website, its management claimed to be: “aware that there are several parties seemingly targeting Emirates REIT through an aggressive campaign of negative stories and false rumours... seeking to undermine investor confidence and negatively influence the REIT share value.”
Corporate value can make or break a company, and yet, many continue to get it wrong when ‘valuing’ a business. Valuing a business is much more than just attaching a price to shares based on the performance of similar stock.
To value a business is to really get under its skin, to know the minutiae of its risks, of its growth potential, and its cash flows to determine a value that represents the true worth of the business - all things considered.
Standard valuation techniques have created an intended consequence of exaggerating market declines, when in fact it has been the valuation techniques that have been at fault.
This explains the reason why so many start-ups often find themselves valued at astronomical sums when they’re still operating in the red. This new trend has dramatically altered the landscape of private equity, historically built on valuations, perceptions and pricing.
Traditional investment models have been thrown out of the window and PE firms are clamouring to invest in technological start-ups like the Ubers and Careems of the world.
Cold hard facts and numbers aside, much of what valuation comes down to perceptions. For a successful valuation, there needs to be a healthy appetite from both buyer and seller, with a shared perception of the company; strength of conviction in the valuation driving their negotiation, otherwise what starts out as an investment may soon become an asset grab.
If the market gets wind that there’s trouble on the horizon, whether for the CEO or for the company, one loses all negotiating power over any asset they’re looking to sell.
Investors looking to maximise their ROI’s by buying cheap will forgo detailed valuation processes in favour of pricing based on hearsay and conjecture. These funds are often very much still as profitable, ambitious and successful as they had always been, and yet they are all too often sold off on the cheap. This is not only an injustice to the value of the work that has gone into the business, but also to the people behind the company, who continue to drive its success in the face of current challenges.
This over-reliance on perceptions means that well-run and valuable firms can become vulnerable to market manipulation through the smallest of efforts. The world of social media means that whispers can quickly turn into tornados, and orchestrated campaigns to undermine a brand’s reputation requires nothing more than an internet connection.
Market conditions are uncertain enough in light of the ongoing pandemic, which has brought into sharp relief the difference between market forces which can be controlled and those that can’t. At a time in which we can predict the future with even less certainty than usual, market participants might consider this an opportunity in which to recalibrate their perceptions of value according to meaningful details, rather than the hazy picture of the market landscape that is often painted by those who are least informed, or in some cases maliciously intentioned.