Executive Summary
The real estate market in Dubai has experienced a long period of rapid growth. The government of Dubai has been keen on supporting this industry, but it avoided influencing the pricing of the products. Forces of demand and supply have been allowed to define the pricing of the products. However, players in this industry have been manipulating these forces to inflate the prices of housing units. Now that supply and demand forces are reaching equilibrium and the actual product prices are evident, the industry is experiencing a slowed growth as potential buyers wait for the prices to drop even further. Although it is expected that after some time this growth will achieve its previous trend, currently the players in this industry have to find a way of overcoming the storm in the market. Several recommendations have been made to help this firm overcome some of these market challenges. It is recommended that KLM Construction Company should expand its market scope when sourcing for raw materials so that it is not limited when making its procurement decisions. The firm should also consider embracing vertical integration strategies by forming mergers or acquisitions in the market. In its current market, it is suggested that the company should focus more on improving the quality of its products than on the issue of pricing as a way of creating a niche in the market.
Review of the Real Estate Market in Dubai
To conduct a comprehensive review of the real estate market in Dubai, STEEPLE Model and Porter’s Five Forces Model will be very important. The STEEPLE Model will help in the analysis of the external environmental forces in the country that affect business activities. The social environment in Dubai has been transformed over the years because of the increasing number of foreigners who are attracted to the city. Its cosmopolitan nature makes it easy to do business in this market. The market is socially designed to meet the needs of both locals and foreign clients. Advancement in the field of technology is also transforming the real estate market. Companies in this industry are making use of technology to lower the cost of production, reduce the time of completing the projects, and improve the quality of the products they deliver to the market.
The economic environment in Dubai has been very supportive of the industry. The real estate market in Dubai has experienced a prolonged period of growth over the last two decades. According to Musa, this started with the emergence of Dubai city as the leading business hub in the region (77). This saw an influx of people into the city which pushed up the demand for houses and office space in the city and its environs. At first, the real estate attracts the rich local Emirati businessmen who saw an opportunity in this market. However, international players were soon attracted to this market due to the ever-rising demand. The construction of Burj Khalifa, the world’s tallest building saw many people travel to the city as tourists to view it and other beautiful sceneries in the country. This meant that the demand for hotels was also rising steadily. Leading multinational corporations in the real estate market such as Knight Frank Agency found their way into the Dubai real estate market.
The cost of buying homes in the country was consistently going up and so was the cost of renting home and office space within the city. This was a positive market indicator for firms in the market. KLM Construction Company being a mid-size company was not much affected by the entry of the giants into the local market. It was not easy to meet the demands, and that explains why the management decided to expand its capacity. It was receiving more orders than it could handle. The management was worried that constant turning away of customers would tarnish its image in the market. It would make the potential clients believe that it could not deliver the products they needed. On the other hand, taking more orders than it could handle was dangerous. Once the clients paid up, they would demand a speedy completion of their projects. There was a fear of delivering substandard products or delaying in delivering the products. This would also tarnish their image in the market. The best option for the firm was to increase its capacity by hiring more employees and improving procurement and construction efficiency.
In 2015, things changed for the worst at a time when many firms in this industry had prepared numerous products for their clients. According to the report by Cooper, the sale of residential houses in Dubai fell by close to 70% in the first quarter of 2015 as compared to the sales registered in the same period in 2014 (99). There has been speculation that Dubai may soon face a property bubble which many analysts have blamed on unsustainable price dynamics. The government of Dubai has avoided any direct intervention in influencing the prices of products in the real estate, a move that some economic analyses claim was dangerous for the industry in the long run. Many construction companies and agencies, including KLM Construction Company, have delayed most of their projects as they monitor the progress of the industry. However, the future of this industry seems uncertain and many firms are contemplating diversifying their products in the market. For KLM Construction Company, it will be necessary to re-evaluate its entire system, focus on having a lean workforce and improve efficiency in all its operations.
The political environment in Dubai has been supportive of the real estate industry. The political class has avoided any negative intervention in this industry. Cooper says that the government of Dubai has been very supportive of the real estate industry which explains why it has experienced massive growth over the past two decades (83). The government has also designed the legal environment to support the industry. There are laws and regulations which govern how players in this industry should conduct their activities. Finally, the issue of ethics is also very important in this industry. The relationship between real estate companies and their suppliers and clients is governed by strict ethical policies to ensure that there is fair play at all times.
Porter’s Five Forces will be important in understanding the competitive forces in this industry, and how they can be managed by KLM Construction Company. The figure below shows the model.
The threat of substitute products in the real estate industry in Dubai is almost non-existence. There are no proper substitutes for the products offered in this industry. However, the threat of new entrants is real. Numerous foreign firms have made a successful entry into this market because of its attractiveness. This has made the rivalry among the existing players very stiff because each firm is trying to expand its market share. Some of the materials used in the industry are imported from China and Japan. This has increased the bargaining power of some of the large suppliers who have control over important raw materials. The bargaining power of buyers has been relatively low over the past two decades, but the slowing growth of the market is increasing their power because they now have several choices to make when they want to buy or rent a housing unit.
Demand and Supply Factors
The United Arab Emirates has experienced prolonged economic prosperity over the years due to its political stability and strategic location in the region. The city of Dubai was not known to many in the 1960s or 1970s. It was just another Arab city that was strategic to the business people that were looking for oil to meet the needs of the West. However, the government of Dubai started developing the city as a business hub using the proceeds from the export of oil. Within the last twenty years, the city has grown dramatically to become one of the most popular business hubs in the world. Improved transport network and security in the region are some of the factors that promoted an influx of people into the city.
The supply of rental houses and office space, which is currently considered to be more than demand, was a direct result of the increasing number of people. In the 1990s and early 2000s, there was a sharp shortage in the supply of housing units and office space in the country. The few houses that were available in the country were not able to meet the increasing demands, especially for the international business people who wanted comfort. The hospitality industry started booming in the late 1990s, but the tourists were not satisfied with the kind of hotels that were available in the city. Some had been constructed several years earlier while others were below the standards they expected. The Industry Life Cycle can be used to explain the path that this industry has taken over the years to reach its current position and the product life cycle of what is offered to the clients.
It is important to note that the data used was from 1900 when the city started gaining a modern shape under the reign of the Al Abu Falasa dynasty. The demand kept pushing up the supply. The industry-first attracted the attention of the local players who saw a big opportunity in meeting the demand. The industry soon became attractive to international players. The government of Dubai has been keen on supporting the industry in a bid to solve the problem of the shortage of housing units. The rate at which the supply of housing units rose started exceeding the rise in demand for the products in mid-2013. However, many players in the industry believed that the demand will start rising sharply, hence they continued supplying the products in the market. The year 2014 was the best among the real estate players because the price peaked despite the slowing demand for housing units. Currently, the supply has surpassed the demand, and many firms are holding their products hoping that the industry will change for the better.
The current status of demand and supply puts the procurement department at KLM Construction Company in a very awkward position. The firm was recently forced to increase the number of raw materials it uses. Some of these materials are sourced overseas, especially from China and Japan. The procurement department had put measures in place to ensure that more of these products were sourced ready for use in constructing houses for rental and office space. However, the demand has fallen drastically. This turn of events will force the firm to review its entire operating system. All the departments are affected, especially the procurement and human resource departments. According to Cooper, it remains unclear whether the country is about to experience a property bubble or the industry will start experiencing impressive growth once again despite the current drop in housing demand (88). The inability of the economists to predict the future of this industry puts the procurement department in a very delicate position. In case the demand will continue falling, then it will force the firm to cut links with some of its suppliers and only retain those whose terms were considered the best. However, if the demand shall start to rise once again, then the firm will need to retain all its existing suppliers for business continuity in this competitive industry. As of now, it is not clear what the future holds for real estate players in Dubai. The best that this firm can do right now is to come up with measures that will help it survive the current market troubles.
Current Pricing Mechanism
The pricing of products is one of the most important factors that define the sustainability of an industry. According to Turner, the best way of determining the pricing of a product is to allow supply and demand forces to play off in the market (56). This pricing mechanism has been very popular in capitalist economies around the world where the principle of willing buyer willing seller is very common. In this mechanism, when the numbers of willing buyers are higher than the number of willing sellers, then the price will go up. The demand for products in such scenarios is considered to be high. On the other hand, when the number of willing buyers is lower than the number of willing sellers, then the demand will drop which would lead to a drop in product prices. For the last 20 years, the number of willing buyers in the real estate sector in Dubai has been higher than the number of willing sellers. This saw the price of many housing units increase considerably over the years. However, the trend has seemingly changed in this market.
Since supply and demand pricing mechanism remains the best and most popular way of setting prices of products, Baily warns that government should always be keen to monitor industry trends to intervene in case there is exploitation (113). The current problem that is witnessed in Dubai is not a drastic drop in housing demand. The problem is that pricing in this industry has remained unchecked for a very long time. As a result of this, real estate agents have been pricing their products much higher than what they should cost. The market is now reaching equilibrium, a stage where the best price for the products is set by natural market forces. It is now coming to the attention of the clients that the prices set by the real estate agents are much higher than the actual cost. This has made many potential buyers refrain from purchasing houses till they are convinced that prices have normalized. This is what has caused the current problems.
The management of KLM Construction Company has a pricing mechanism that is based on its terms and conditions that defines its operation in the market. According to Baily (18), when setting up terms and conditions, the primary interest of a firm should always be to meet the needs of its customers in the best way possible without jeopardizing its own need to be sustainable. As such, these terms should be favorable to the customers, but in a way that will ensure that the firm remains profitable. For example, there should be a term that states how long the client should take to make the payment for the product they have purchased. The liability issues should also be clearly stated in the terms and conditions and the clients must be made to understand these terms before signing the purchase documents.
One area that this firm should be keen on is the issue of the battle of forms. This can be common when selling its products in the market. The management should be keen to ensure that when a battle of forms arises, then the conflicting interests are harmonized as soon as possible and in the best way possible. No single purchase should be finalized if the two parties have not agreed on how to conclude the process (Fung and Tse 56). No assumptions should be made because such assumptions may lead to litigation. As Cooper (87) ways, every court case that a firm engages in affects its image in the market negatively, especially if it involved the firm and one of its customers. Specialist Insulation Ltd v Pro-Duct (Fife) Ltd [2012] CSOH 79 is an example of litigation that resulted from the inability of the parties to harmonize their terms and conditions before engaging in business activity. Both parties assumed that the business engagement would be based on their terms. This led to a lengthy court battle to prove whose terms had to be upheld. KLM Construction Company should avoid such cases.
Conclusion and Recommendations
The discussion above reveals that the real estate market in Dubai is big and it is still growing. This is one of the fastest-growing cities in the region and as such the demand for houses is expected to continue rising. It means that the current high demand for housing products currently witnessed in the market is expected to grow with the increase in the population. However, the emergence of new firms, both local and foreign, has stiffened competition. Firms are keen to protect their market share using various strategies. KLM Construction Company is forced to come up with effects that can help it overcome this challenge. One of the ways of doing so is to come up with procurement strategies that will enable it to lower its production costs. To win customer loyalty, KLM Construction Company is forced to have fair pricing for its products. This can only happen if it can lower its costs of production, which means that it must have ways of getting high-quality raw materials at low costs. The following recommendations may help this firm achieve these objectives.
- The management of KLM Construction Company should expand its market scope when sourcing raw materials. There are chances of getting better deals if only the firm has more options to make.
- The management of this company should consider vertical integration where it forms a merger or acquires firms supplying it with most of the important raw materials. The strategy will increase its bargaining power in the market.
- To manage the competition in the market, this firm should focus more on the quality of its products than on the price. By focusing on quality, it will be creating a unique niche for itself in the market.
Works Cited
Baily, Paul. Purchasing principles and management. Harlow: Financial Times/Prentice Hall, 2009. Print.
Cooper, Peter. Opportunity Dubai: Making a Fortune in the Middle East. Petersfield: Harriman House, 2015. Print.
Fung, Hung, and Yiuman Tse. International Financial Markets. New York: Cengage Learning, 2015. Print.
Musa, Muhammad. Report: Dubai 2014. Oxford: Oxford Business Group, 2014. Print.
Turner, Robert. Supply Management and Procurement: From the Basics to Best-in-Class. Fort Lauderdale: J. Ross Publishers, 2011. Print.