The US credit crisis has continued to ripple across economies and real estate markets around the world, its impact being the top risk facing the sector worldwide. The global real estate industry went through tumultuous phases for most of last year, with little signs of bouncing back in the short term. The effects, felt the strongest in the west, spread to the region's once buoyant property sector, which is now realizing the tightening conditions in the market perhaps more than any industry due to its heavy reliance on capital. It suffered serious setbacks when local investor sentiments reeled under the impact of the credit crunch. According to the 2009 Ernst & Young Real Estate business risk report, market uncertainty coupled with the credit crunch continues to pose significant risk for the real estate industry this year. According to the survey respondents, the 2009 top 10 risks rankings for the real estate sector are (2008 rankings shown in parentheses): 1. Continued uncertainty and impact of the credit crunch (new) 2. Global economic and market fluctuations (7) 3. Impact of aging or inadequate infrastructure (6) 4. Global war for talent (14) 5. Changing demographics (13) 6. Inability to find and exploit global and nontraditional opportunities (4) 7. Pricing uncertainty (new) 8. Green revolution, sustainability and climate change (9) 9. Economic vulnerability and regulatory risks in developing markets (8) 10. Volatile energy costs (new) Mohammed Dahmash of Ernst & Young's Real Estate Transaction and Advisory Services Group in the Middle East, said: ‘'The effect that the credit crunch has had on investor sentiments and market confidence makes it even more acute. The hugely leveraged property sector credited its growth to liberal lending practices and a bullish investing public. With institutions and individuals adopting a very cautious stance, liquidity remains the key concern that causes many projects be put on hold - some even risk cancellation.'' For the regional sector, the next major risk stems from economic vulnerability and regulatory risks. ‘'Economic and regulatory risks are not always easy to identify and define in emerging economies - especially during a downturn. Some crucially strategic challenges include managing specific local regulations like property rights, tax laws (where applicable), arbitration, and residency clauses. Equally important is the enforcement of laws concerning bankruptcy and foreclosures. Any serious player needs to be willing to make long term commitments in emerging markets like the Middle East and must be prepared for a learning curve to better comprehend the opportunities and related risks,'' Dahmash added. He points out that with shifting demographics being seen as a major area of concern for the region, there is also an underlying need to link strategic business growth plans to market demographics. Demographic analysis and forecasting is often seen as a natural part of the real estate industry because shifting demographics will determine what will be built, where it will be built and how it will be funded. “A ballooning middle class, for instance, will lead to demands for basic services, including education; create demand for a leisure and tourism infrastructure; and strain the ability of countries to make more development-oriented investments. Unless regional players factor in the rise of a growing middle class with an appetite for affordable housing, the sector may experience an unbalanced overabundance of luxury properties. Such a scenario can potentially prolong the industry's recovery process - a hugely avoidable proposition,” Dahmash pointed out. In addition to revealing the top 10 risks, the report identifies the following risks that sit ‘below the radar' and which may move up the risk ranking in the years to come: 11. Geopolitical shocks 12. Financial reputation 13. Inability to insure certain properties 14. Regulatory and compliance risks Despite various risks that currently confront the industry, the real estate sector is poised to tide over the crisis. The first round of market corrections have happened. This has led to some fundamental and structural changes in the operating business models. Government support in terms of increased infrastructure spending and bail out guarantees to financial institution will help in restoring confidence and bring back the industry to its feet. Dahmash said “this is the best time to reassess and put one's house in order so that businesses are best equipped to capitalize on the opportunities that will emerge from adversity.” __
