Guest Articles

As those connected to the world of real estate development will testify, we know how much time is allocated to studies of the land, the product, pricing, costs, timeline, and of course sales. On the other side of the trade, investors look to yield, absorption rates and capital, whilst somewhere in the middle we have lenders assessing debt levels, collateral and the ability to repay.

But there is a quiet shift happening, particularly in the development space. In a market dominated by off-plan real estate transactions, execution capability is taking up much more of the conversation, and a key determinant of this starts not on site, but in the boardroom – Governance.

Real estate is a business underpinned by trust and confidence. Do I, as an investor, trust the developer enough to hand over my capital, and then once I have bought in, am I confident in the developer’s ability to deliver? It is the underlying governance that makes this possible, and it is this same governance that is becoming one of the sector’s most valuable currencies.

As the world’s capital markets evolve, so do the world’s real estate markets. Money flows through bricks and mortar on a daily basis. When the capital flow is strong, real estate companies tend to be rewarded for speed and scale – governance is seldom top of mind. When the market slows, sales no longer provide a shield for weak governance, and the gaps become highly visible.

Rarely does anyone fix the roof while the sun is shining, but when the rain starts, poor governance becomes incredibly obvious in multiple and familiar ways. Poor disclosures, overly aggressive property launches, misaligned incentives, weak risk controls and undisciplined capital allocation – these are the signs.

Real estate development is not like Silicon Valley. Over there, founders may like “to move fast and break things” and view governance as a hindrance, but the reality is that real estate benefits from a little friction. At every step of the process, significant sums are being invested, and those decisions should not be taken lightly. In my industry governance is about mitigating execution risk.

Execution risk destroys value, particularly in an industry like real estate development, where we operate across long timelines, with multiple stakeholders, and across different jurisdictions. We typically manage land acquisitions and disposals, planning processes, design, procurement, financing, construction, regulation, customer service and hospitality. Every stage of this introduces risk to our systems and processes.

It is the practice of good governance which helps us to mitigate risk and it is the system which helps us to identify, manage, and communicate the challenges before they manifest. It is governance which determines whether a project is launched today or tomorrow, whether the pricing is realistic, whether the assumptions have been properly stress tested, whether the funding is sufficient and what the company will do if the market turns.

So I look at the potential friction caused by good governance as a positive thing. It is the constructive tension created from challenge, not with pessimism, but with discipline. This is a very healthy tension to exist within a business.

Real estate might not be the most innovative industry, but make no mistake, this does not mean it is without evolutionary capability. Real estate developers, particularly those leading the industry, are moving away from the transactional and towards the institutional. The question is no longer “how quickly can we sell?” but “how sustainably can we create value?”

This inflection point is important as institutional capital holds real estate developers to a higher standard. The due diligence is no longer just on the project, but on the organisation behind it. Investors increasingly want to understand board oversight, internal controls, disclosure quality, risk management, conflict mitigation, succession planning and ESG compliance.

The need for this type of understanding is simple. Good governance reduces uncertainty, and greater certainty usually lowers the cost of capital.

In the UAE we have three active stock markets, and the public equity markets are increasingly governance oriented. Clear rules and regulations designed to protect investor interests as well as the integrity of the market keep us in check domestically, but they also make us easier to understand by those looking in from overseas.

This helps investors to understand not just what the earnings are, but how they are generated, how they are managed, and how durable the strategy is that is in place. Governance drives people towards long term thinking – a company with excellent governance but weaker profitability may command stronger investor appetite than a company that is opaque but more profitable. This is down to the way in which capital rewards predictability, and predictability is chiefly driven by governance.

Taking another view on governance, this is about more than compliance, it is about culture. How is the bad news escalated, if at all? How are assumptions challenged? Is candour rewarded? How well are decisions documented? Are employees accountable? In short, governance is really about the way people and companies act when they think no one is watching.

This is where leadership of in-house Counsel kicks in. Too many view us through a narrow prism of contract review or legal interpretation. But our role is also that of strategic advisor for the navigation of ambiguity, which the real estate industry is full of – the market moves, regulations evolve, customer expectations shift, the regional situation changes and capital becomes more selective. 

For a long time, UK industry has recognised the link between good governance and enterprise value, and this has had a positive influence on corporate behaviour, which in turn points us towards a simple truth – trust compounds. Compounding trust creates more resilient relationships, which improves the sustainability of any business. Whether this is through the onboarding of better talent, stronger partners, deeper capital, it becomes a virtuous cycle.

This is important for the UAE as it continues to evolve beyond a pure growth market into something more mature, and a genuine global hub. In such an environment, the competition is not just won through growth, it is won through credibility, which as we have established, is earned through governance.

Because we must surely view governance as strategic infrastructure – the winners of tomorrow are not going to be those with the biggest land banks, but those who inspire the greatest levels of trust.

Author: Fayez Khouri, Chief Legal Counsel at RAK Properties