Wednesday, May 27, 2009

Property auction 'flop'

A follow on to my previous post about the slump in property prices because the first ever property auction in Dubai was held yesterday evening.

Arabian Business uses words like 'failure' and 'flop' in its stories, but that's too simplistic.

They also headline one story: "Property market fails its big test" which is pushing the boundaries a bit. Big test? It was just an auction of four properties. The big test is actually the ongoing, day-to-day market.

Media and the rumour mill will undoubtedly use this as another example of a still-collapsing market but I don't think it actually tells us anything other than the concept of the property auction isn't understood here.

The failure in my opinion is less the auction results than the fact that the market - agents, vendors and potential buyers alike - was not made aware of the concept and doesn't understand what the auction was all about.

That's the most important job for the company behind it, Madania Real Estate, to tackle before the next auction, which is planned for June.

Auctions are the usual way of selling a property in Sydney. I've bought and sold at auctions, I've been outbid at others, I've dropped out when the bids went too high, I've attended very many others just for market information. In Oz we're used to them, we understand them...but they're new to this market and most people come from countries where they're unusual so they have no understanding of them.

The Aussie format has simply been brought to this market as a complete package, but not enough work was done on explaining the concept to a market which has no knowledge of it.

The general view here is that auctions are where you get a bargain, that this is where the properties offered will be distressed sales by desperate owners.

That couldn't be further from the truth.

This is an alternative to a private treaty sale of a property, which is where the property is simply advertised at a price - on which the buyer always asks for a discount.

In an auction the vendor puts a reserve price on the property, if bidding reaches the reserve the property is sold to the highest bidder. If it fails to reach reserve, which is not unusual, the highest bidder and the vendor are brought together by the agent who tries to get them to compromise and agree a price. Not much different from a private treaty sale where the two parties haggle over the price.

In fact in Oz it's often seen as a way of getting a price better than market value, particularly if you're selling a desirable property and there are two or more interested buyers who will push the price up. I've seen that happen more than a few times.

The complete lack of understanding of this by the market here is shown in a couple of the Arabian Business reports.

Anil Bhoyrul says, for example:

The concept of property auctions is that a number of dirt cheap properties are up for grabs.

You turn up with a small amount of cash, and walk away with the deal of your life. The greater the personal financial misery of the seller, the better.

Which is where last night went wrong to begin with. According to Kuceli himself, the sellers who put their properties up for sale were merely looking for another sales channel, having tried newspaper and web advertising.

They were not actually that desperate. That’s why no sales were made.

Way, way off the mark, that isn't the concept at all.

Anil continues:

Tuesday’s auction was the first test of the public’s appetite to get back into the market. Would they come in their hundreds, cheque books and passports ready, eager to prey on the ashes of the property boom?

I disagree, it wasn't the first test of the public's appetite to get back into the market, we have ongoing daily information on that, it was simply a test of an unknown method of selling properties.

And then:

...of the 100 people who showed up, only 9 had registered beforehand to even be allowed to make a bid. Who were the other 91 people? Around 35 journalists and 56 estate agents.

Again this demonstrates a lack of understanding because it's perfectly normal. I've been to many auctions where there were scores of people but only one or two bidders (and some where there were none). The vast majority are neighbours and friends of the vendor, plus people there to gauge the market.

Another story includes this from a real estate broker:

“There are a lot of distressed properties for sale from people who are either leaving town or just want to increase their cashflow immediately. It’s those properties that should be auctioned.”

Again it shows a lack of understanding of the concept.

Another problem with this auction was the few properties for sale, only four. There were more planned but the Land Department has to approve each one apparently, and approvals weren't obtained on all in time for the auction.

Also, the auction was held in a hotel. In Sydney the usual method is for the auction to be held on site at the property for sale and I suspect this may be a better way here too.

This auction method may or may not be the way to go here, but we won't know that for sure unless in the first place everyone involved in the market understands the concept. That's the critical project for Madania Real Estate.

But the auction results don't tell us anything we don't already know about the property market.

By the way, in Sydney the clearance rates (properties sold at auction or by negotiation up to midnight on auction day between highest bidder and vendor) have been at 66% the last two weekends. A third failed to sell at the auction.

You'll find the stories here, here and here.


Anonymous said...

you have probably been too simplistic in your analysis of the auction as a sales channel. you must be absolutely right about australia, i know nothing about the exact role of this channel there. but here, you are looking at a diametrically different market. australia would have 99.9% sales at auction by its citizens, and buyers would also probably be the same. .and they probably own the property outright.there the objective is to find a higher price, and sellers can afford to sit it out if prices are not good

in uae,i guess 99.9% of these sales would be by expats, to expats.many of them could be staying in their property now, but lost their jobs, or want to leave for whatever reason. but they cannot legally leave, till they settle their mortgage. and they probably dont have the money to do that. so they could look at selling at auction as a desperate way to solve their problem, raise whatever they can so that the balance mortgage can be settled, and they can leave the country. this is definitely one possible scenario, and could be a good percentage. so in dubai it is not always about making more, but also could be about getting out!

Seabee said...

Anon@3.25 I agree, it's a totally different market - but, as I said, the Australian auction concept has simply been introduced here as a complete package, without any adaptation.

That's what this recent auction was and it's the point I was making about the concept behind it, which hasn't been understood here by the market or the media.

It could well be that a totally different type of auction - the distressed sale type - is actually what would work here, but that isn't what's being offered.

Reluctant and Recluse said...

The problem as you astutely put it, is not just that the buyers (or potential buyers) don't know auctions - quite frankly the vast majority of expat buyers are not very smart here, period - no matter which continent they come from. And, i am not just talking in the property realm, its in the general 'business' realm as well.

They form convoluted ideas about how things should be and follow those blindly; they also get led by trends in either direction like lambs.

I'm not going to comment on the media/journalists here, 'cause most of them are beyond comprehension - stuck in the box automotons. Most of the times i think they are picked because they can write a coherent sentence in English.

In anycase, another thing going on in this market is a distinct 'eastern' phenomenon: We love the other guy to fail and be in pain - its true. Most easterners take great pleasure in the pain of others. I met so many people since i moved here who didn't take stakes in the property markets but were vehemently vociferous about everybody making money (and rising rents). Same people today are gloating with glee - and even now though they might want to move to a nicer area (buy or rent) they are waiting for the damn thing to be handed to them for free.

There is a lack of good educated investors currently, and of course of capital as well; For Dubai's case as i see it we need to shake loose these bottom feeders first, who don't understand the term 'reserve' price. I guarantee you, they are actually offended by the thought of the same.

Incidentally, though i am quite fond of auctions myself, i always remember on one of the first econ classes i took in which the prof. taught us about the 'winners curse' - if at the end you are the highest (successful bidder) you invariably paid too much for the item. :)

Anon@3.25: you do contradict yourself, as by definition someone with a reserve price on an auction is not looking to just sell and get whatever - there may well be those people in the market, but this auction was not one of those.

The spectators gathered at this auction were there to feed on that very same misery, looking to capitalize on someone elses' loss and were obviously let down when they didn't see crashing market prices - had that happened i can only imagine the headlines and the reaction.

I own just one property in town, bought it 4 years ago direct and own it now outright and am not looking to sell. I get calls (unsolicited) even now about selling my property at some ridiculous price (though still higher than what i paid) and when i say no, you should hear the reaction i get - and a few times just to have fun, when i say i what i want for the property these same buyers/agents get absolutely hysterical... :)

But, the most telling reply is 'you know you should sell the property at X price, because i can get one in your building for this much' and i simply tell them 'then go get that property, why are you calling me?' - they just don't get it!

Seabee said...

R&R, there's a lot of truth in your comment...although I have to disagree with you that our 'journalists' may be picked because they can write a coherent sentence in English. I know the individual words are English but 'coherent'? All too often I have no idea what they're actually trying to say.

Like you I detest people who live here but gloat whenever they see something go wrong. I simply don't understand a mentality that revels in others' misfortune.

Spear The Almighty said...

Fact, property value in prime location has decreased with around 60% in the last year. I have valuations proving it.

My opinion: The market was too expensive to start with. 1 bedroom flat for AED 800,000 - AED 1.2 million. That prices wasn't logic.

We are just starting to see 2007 prices again which is still expensive, but more logic.

Seabee said...

Spear I partly agree.

Prices 'to start with', if we take that as when the first developments went on the market, were way, way too low from the developers. That encouraged speculators to jump in and within weeks the prices were doubling, and more, and the feeding frenzy began.

Just one example is my building where the original price from the developer was Dh450,000 for a 2-bedroom. Speculators bought in bulk immediately and soon had them back on the market for a million.

As you say, prices are now getting back to more sensible levels.

marhabahomes said...

We can't say it is a failure. It is a starting point to recover from recession.