DRIVING VALUE THROUGH DIFFERENTIATION — IN DUBAI'S REAL ESTATE DEVELOPMENT MARKET

by: Sean McCauley

A LOOK AT THE DUBAI RESIDENTIAL PROPERTY LANDSCAPEIn-depth insights into a dynamic industry.

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Over the past two years, the Dubai residential property market has witnessed a decline in average sales prices whilst simultaneously there has been an increase in the number of new residential off-plan project launches.

Diving into developer data.According to JLL’s Q2 2018 Dubai real estate report, approximately 34,000 units are currently under construction and scheduled for delivery by the end of 2018, with a further 50,000 and 36,000 units scheduled to enter the market in 2019 and 2020.

What are the thought leaders saying?Whilst there are signs of demand remaining healthy, with over 100,000 units in circulation from now until 2020,this generous volume of supply shall no doubt have an effect on demand.

The numbers predict the future, and there’s a need now more than ever to find smarter, more efficient ways of tapping into the market. The double effect of an increased supply and a decline in prices has led to an overall softening in the market. Due to this shift, developers are becoming more competitive in terms of their value offerings and more aggressive in their awareness and marketing campaigns in order to maintain turnover momentum.

Let’s talk figures.

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1. EXTENDING PAYMENT PLANSPayment plans have shifted from typically being linked to construction progress (milestone instalment payments with the full purchase price of the property being paid by completion) to the majority of developers offering post-handover payment plans, which vary from 18 months up to seven years. The rationale behind this move is to target and attract a wider range of end-users and investors through the offering of more attractive and investor-friendly payment plans.

2. REDUCING PRICE POINTS Ticket prices of units have reduced across the board not only to create economies of scale to a wider buyer audience but also to reduce investment risk by lowering the quantum of the investment.

3. INCREASING MEDIA SPEND, EXTENSIVE MARKETING CAMPAIGNSThere has been a significant increase in the marketing spend of developers with most embarking on multi-million Dirham international marketing campaigns, including roadshows, exhibitions and retail stands in shopping malls.

4. INCREASING COMMISSION PAID TO ESTATE AGENCIESMarket commission rates paid by developers to estate agencies have increased from an average of approximately 2% to 4%, with many developers paying in excess 5%. Developers historically paid commission in several phases linked to receipt of the instalments from the buyer, which would take anywhere from several months up to a year, however it is now common practice for brokers to receive their entire commission within weeks of concluding a sale.

5. INCLUSION OF PROMOTIONAL INCENTIVESDevelopers are including additional incentives to entice buyers into purchasing, some examples being to waive the required 4% Dubai Land Department registration fees (i.e. pay it on the purchaser’s behalf), the inclusion of service charges for periods of anything up to 10 years and the issuing of guaranteed rental returns for several years.

6. REDUCING DOWN PAYMENT PERCENTAGESDeposit down payments have reduced from the traditional 20% down to 10% as a market norm, with some developers even taking as low as a 5% down payment.

7. INCREASING THE SIZE OF SALES TEAMSThe size of developers’ internal sales teams has increased significantly with some of the larger developers having in excess of 500 internal sales consultants.

How have developers reacted to the softened market?A look at the methods in action in a highly competitive market.

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Financial effect for developersThe bottom line about the bottom line.

The implementation of sales incentives coupled with increased operational changes has financially impacted developers, clearly evident in both their operating profit margins and their cash flow.

MONEY MATTERS

From a cash flow perspective, if a developer only collects a 10% down payment from the purchaser and then pays out 4% commission to the sales agency and the 4% DLD fee on behalf of the purchaser, then essentially 80% of the down payment has already been paid out and accounted for before the developer has even physically received it. This is because by law the down payment received from the buyer is actually paid into an Escrow account and not to the developer directly. Albeit a good short-term challenge to have, but a higher rate of sales can ironically actually place increased cashflow pressure on a developer. Adding to the cashflow challenge even further is the fact that the developer also needs to fund construction costs, marketing campaigns and operational costs.

HIGHER COSTS, LOWER PROFITS

A report by research firm Alphamena showed that whilst sales performance had increased, the profits of the UAE’s biggest listed developers Damac and Aldar had declined as high as 46% in the case of Damac1. As a further case in point, although Emaar’s revenue had increased by 35% their cost of sales had surged 80%.

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1 Source: https://bit.ly/2OZcLZs

SMALLER PROFITS CALL FORBIGGER THINKINGGlobal trends, local insights.

The key to punching above the weight of the industry lies in adding value to the customer along various touch points of the value chain and by placing a higher degree of focus on product differentiation. A unique position in today’s market is essential for survival.

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Drawing from best practice in other industriesThere is crossover when it comes to effective ways to market and adapting to changing consumer landscapes.

How did Best Buy, one of the largest electronics retailers in the USA, eliminate the online threat of Amazon in 2013?Amazon was encouraging customers to view products at Best Buy stores and then buy them for a lower price online through Amazon, a practice known as “showrooming”. This tactic was responsible for four years of declining sales revenues and profit margins for Best Buy and resulted in the closure of many competitor electronics retailers. The newly appointed CEO of Best Buy at the time encouraged the practice of showrooming, as he was optimistically convinced that it presented an opportunity to sell to customers and that it was not necessarily a threat.

His solution was not to discount their pricing but rather to add value to the customer in areas that Amazon could not, which was to “reinvigorate and rejuvenate the customer experience” and to work with vendors to “innovate and drive value”.

Part of the “reinvigorate and rejuvenate the customer experience” plan was to build stronger, engaged, rewarding relationships with its customers offering unique benefits. Under the “innovate and drive value” plan he saw the solution as differentiating the customer offering. Staff received focused training to improve their customer engagement and learn how to boost the customer experience with better retail execution.

The simple, effective, three-pillar process —advice, service and convenience.The process meant implementing the following initiatives: Dedicated concierge staff members to help shoppers find what they needed, increased staffing, same-day delivery (shorter delivery times than Amazon) the provision of a ‘geek squad’ to offer installations, visits to customers’ houses to discuss their home theatre options, a comprehensive look at customers’ houses to devise a “personalized technology plan”, in store classes on digital photography, home automation, internet safety for children and an Ignite program to feature innovative products from startups.

By adding value to the customer, Best Buy was able to convert more sales. Operating margins had increased as a result of the improved customer closing rate and the share price continued to surge. According to analysts, 90% of Best Buy’s customers actually pay more for the same product from Best Buy than what they could buy it off Amazon for.

Confident with their customer offering, Best Buy ironically ended up encouraging “webrooming”, the consumer practice of researching products online before travelling to a physical store to make the purchase.

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FUTURE FOCUSWhat’s sustainable, and what’s just not working hard enough?

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The current practice of discounting by developers is not sustainable in the long-term as it will ultimately erode their financial stability, the same way any other business cannot offer huge promotions on Groupon or Cobone indefinitely.

There is a place for discounting, which is traditionally used to increase short-term sales, to move unpopular stock, to reward valuable customers and to encourage purchasing through a certain distribution channel, but it cannot be an intrinsic part of a developer’s business model. A restaurant is a good example, it makes sense to offer a short-term promotional discount through Groupon as an effective way to attract new customers, however, it would not be feasible to do this on an ongoing basis. Top restaurants don’t need to discount as they have a loyal customer base who are prepared to pay a premium due to the increased customer value.

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How can developers maximise the market?A value + differentiation vision.

1. Give clients what they actually want rather than what you think will be popular or wanted. Developers have the habit of launching a project and unit mix without first doing the necessary market research to validate their concepts. Customer Insight is becoming increasingly critical in a competitive market and will result in products that meet a higher level of customer needs. For example, market research may reveal that a storeroom is a major requirement for families living in compact apartments and so providing storerooms in a project may result in improved sales for a developer.

2. Focus on delivering true USP’s (unique selling propositions) as these will attract customers. A true USP is something that is unique and difficult to replicate. As an example, developers often state that the USP of their project is its location and views, yet there are other competing projects within close proximity with similar if not better views – hence those are not USPs. Don’t confuse the features of a project with its USPs.

3. Products must be true to their target market positioning, i.e. you can’t position three-bedroom apartments in a project as being ideal for families and then only provide one parking bay with the unit. Products that are fit for purpose can mean the difference between lost deals or sales success.

Add value to the customer to drive business velocity rather than resorting to discounting.The hard truth is that there are no quick fixes, however there are a multitude of business practices and initiatives that developers can adopt to improve their value offering.

In brief, the solution is to provide services and solutions that solve real customer needs, with some simple yet highly effective methods:

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4. Pay more attention to project and unit design - move away from the typical ‘cookie-cutter’ floor plans. Well-designed floor plans will eliminate inefficiency and wasted space allowing developers to offer units at lower prices due to the reduction in size, yet still delivering all the same benefits.

5. Align the features and benefits of the project with the target audience, i.e. an end-user occupier is not necessarily interested in the projected ROI or rental returns. They would be more focused on the lifestyle benefits of living there, the build quality, the proximity of attractions, schools, retail malls etc.

6. Improve the overall client journey, from the transition through the prospect journey, sale journey and ultimately to the customer journey. There are numerous touch points through the customer’s life cycle and they should ultimately all strive to reflect the brand values of the developer and create a company that customers love. Often a salesperson will do an excellent job with a client by turning them into a strong advocate for the developer only for a rude or insensitive colleague from the developers’ finance department or handover team to undo the goodwill that was created.

7. Avoid being too ‘Per SqFt Centric’ in your approach to buyers. Sure, rate per SqFt is important from a construction and bill of quantities perspective, but there are a significant number of buyers who don’t consider the asking rate per SqFt as their dominant buying criteria.

8. Accept that buyers are maturing at a rapid rate and are asking a range of questions that were not asked before. Questions such as who is the contractor? What has the developer built and delivered previously? What guarantee do I have that the project will actually be delivered on time? Who will be the appointed facility managers? What are the specifications of the finishes? etc. Developers need to build trust with the customer and have solutions to buyers concerns that will ensure a high level of confidence.

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WHAT DOES SUCCESS LOOK LIKE?

Bigger picture thinking

The strategic goal for a developer should be to use the value chain to gain competitive advantage over its rivals through differentiated products and services. The result is a business model which is more resilient to market turbulence and that delivers consistent levels of profitability.

If you as a developer create a product that customers really want, the customers will naturally come to you, so would you still need to pay brokers 5% commission? Would brokers not be happy to sell far more units to a wider client base at around 2% commission?

If your customer has an excellent journey throughout their purchase and you deliver on all of your promises, wouldn’t the referral business and repeat business gained from loyal customers not outweigh the costs of continuously having to find new buyers?

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About the author

About DevMark

Sean McCauley is the CEO of specialist project sales and marketing firm, DevMark.He holds an Executive MBA from a leading business school and has also completed the Strategic Management and Innovation program from Harvard University.

DevMark specializes in project sales and effective marketing delivery, providing smart, strategic and results-driven solutions to property developers.

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Disclaimer: The information in this document has been obtained from and is based upon sources that Devmark believes to be reliable, however, no warranty or representation, expressed or implied, is made to the accuracy or completeness of the information contained in this document, and same is submitted subject to errors, omission and withdrawal without notice. All opinions and estimates included in this document constitute Devmark’s

judgment, as of the date of this document and are subject to change without notice.