Pressure Has Never Been A Good Advisor

Sven Gade FIH, Director and Head of Consulting at PKF – The Consulting House, Dubai, tackles the subject of dealing with pressure and making the right decisions in times of crisis.

Not a day goes by without announcements of projects cancelled, postponed, placed on hold or to be sold worldwide.  Yet it appears that Dubai is getting more than its fair share of attention.  There appears to be an underlying “See? Told you so!” mentality in the market, which makes it “chic” to report on the latest project bad news.

Yet, economically minded people are aware that markets are not influenced so much by finance, demand and supply, but first of all by a much more human phenomenon:  Belief!  If enough participants believe that the markets will turn down – guess what? - they will!  So in reverse if sufficient knowledgeable industry experts started to present positive business opinions that should help to turn the current scenario around, should it not?

On 13th May 2005 I presented to the UAE – German Partnership Forum in Essen, Germany.  My task was to show to the audience that there is more to the UAE than Dubai - even in real estate development terms.  At that point Dubai was approaching US$ 100bn total of announced mixed use developments and the other emirates came in at about a further US$ 60bn combined.  One of my opening statements to entice the audience was the introduction of a new monetary thinking unit for the UAE: “US$ Billions” (instead of millions).  With hindsight, that statement and the figures quoted above strike me as very prudent – since then we got used to Trillions!

The last slide of the presentation in Essen dealt with a then popular question: “Will the Bubble burst?” to which my answer was twofold:  a) there is no bubble and b) the planning time line of Dubai is long term (10-15 years).  Should demand slow down, it would be relatively straightforward to slow down or stop development(s).  I also indicated that there might be some slowdown in growth over five years.

That is exactly what is happening now and the reactions are entirely sensible and good practice – with the exception of market reactions in general and press coverage in particular.  Some decisions might not be popular but no less sensible.
Real estate investment and development decisions are very complex and have to consider a multitude of dimensions, and they are often made under immense pressure.  Frequently, they have to be based on market impressions (belief), especially in developing countries where statistical data is not available over a long term history.

Contrary to public perception however, decision pressure does not only occur during crisis times.  The phenomenon applies to both market boom and depression.  In boom times, decisions are frequently made on a “me too” basis.  In recessionary times they are made based on pull out panic to “cut back” on activities.  In either scenario, the decision makers often do not have the chance to explore all possible options - they go for obvious choices.  Thus opportunities are missed – pressure is not a good advisor.

Especially in recessionary times, time should be given to long quality looks at options – and preferably involve external expert advisors with a lot of experience from other projects and regions.  Keep in mind: depressions in particular typically reduce present or future supply (project cancellations). This is not a negative trend – it actually creates opportunities for those who stay and think strategically!

The options for distressed projects range from re-positioning via re-financing to rescheduling – exit should be the last option for projects already underway.  For projects in early concept or planning stages the exit option is easier to take but it will influence the future demand - supply balance just as much.  We at PKF-TCH believe that strategic counter-cyclical behaviour is a fantastic way to maximise opportunities, which is why we launched a short assessment (due diligence) service to help participants to execute a fully informed decision making process.  Often, independent reviews add further ideas and options and calm down the decision-making process whilst adding reassurance that the right decisions are being made – the best way to benefit from opportunities.

For more information go to www.pkf-tch.com.

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