Effective Business Models and Value Creation Strategies – The Keys to Surviving in a Volatile Real Estate Market

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Booz & Company examines the strong need for developers in the MENA region to learn from their past mistakes and build new core and differentiating capabilities – so as to ensure a successful and sustainable future in the real estate sector

Ramy Sfeir, Principal and Fadi Majdalani, Partner with Booz & Company
Ramy Sfeir, Principal and Fadi Majdalani, Partner with Booz & Company

The property market bust that occurred in 2009-2010 in most of the Middle East and North Africa (MENA) region, exposed deep structural prob­lems in the sector. Today, if the leading real estate developers are to recover and deliver sustainable risk-adjusted returns to shareholders, executives will need to focus on creating value, rather than simply erecting buildings. More importantly, they will need to learn from their past mistakes errors that became apparent during the downturn. According to management consulting firm Booz & Company, MENA real estate developers can prepare for the next property cycle by building key commercial capabilities and reconfigur­ing their market-facing approach. With the correct ingredients, property com­panies can better position themselves to capture emerging opportunities and enter underserved parts of the market as the regional recovery accelerates.


The MENA real estate development sector went (in the space of a few months) from one of the most active in the world, to one in which firms sought assistance to meet their debt obligations. Developers made similar missteps during the dramatic growth surge, missteps that became more apparent as the market faltered. In reality, developers in the Middle East grew very fast into multiple real estate segments and adjacent businesses, often neglecting commercial capabilities and profits in favor of prestige projects, and failed to manage risk and revenue streams properly.

In order to better understand the region’s real estate sector, one must understand the intricacies of the Middle East and the specifics of the dif­ferent sub-markets.

Real Estate in the Middle East: A Tale of Two Markets

The MENA real estate sector consists of two very different “old” and “new” markets, with distinct and sometimes contradictory characteristics. The “new” markets comprise the rapidly-growing population centers of the Gulf Cooperation Council (GCC) states, such as Abu Dhabi, Doha and Dubai. These cities are always evolving thanks to a surge in hydrocarbon revenues, an influx of expatriate workers, and the entry of speculative capital.

“These new markets present a plethora of opportunities; they are known for landmark property developments as well as large projects that have enjoyed strong government backing. These factors encouraged many developers to grow beyond their original mandates, scale, and capabilities. Unsurprisingly, the real estate crash hit these new markets incredibly hard. — ”Fadi Majdalani, Partner with Booz & Company.

By contrast, the old markets such as the cities of the Levant, such as Amman, Beirut and Cairo – have matured gradually over past decades and presented moderate growth opportunities. The old markets are characterized by relatively constrained availability of land and financing, and therefore, present limited opportunities. Any new developments that intersect with these old markets are generally small-to-medium-sized, and managed by a fragmented group of private developers.

Additionally, in the old markets, the property sector’s effect on the broader economy is more constrained than in the new ones.

The UAE: A Prime Example

The deep challenges faced by the leading real estate players are nowhere better illustrated than in the experi­ence of the UAE. Prior to the market’s downfall,  property assets and prices in the UAE grew sharply on a wave of massive projects, coupled with the availability of speculative capital in unparalleled quantities before crashing and causing difficulties that rippled through the broader economy.

In those days, and for understandable reasons, UAE real estate developers put speed and scale over and above all other factors when making decisions. After all, the country was engaged in a high-priority program to encourage new economic activities. “Seeking to capitalize on its prime location and to leverage the business-friendly environment it had created, the UAE needed to provide a sufficient volume of high-quality real estate,” said Ramy Sfeir, Principal with Booz & Company. “This was required to support emerging industries such as finance, communications, and tourism. Real estate companies therefore built their businesses and operating models around the promise of creating, selling, and operating large-scale developments.”

The initial results were impressive. Real estate prices grew at an explosive rate of more than 10 percent per annum from the beginning of the century until 2008. In 2009-2010, however, the property boom turned to bust. After a decade of expan­sion, the global financial crisis, the disappearance of speculative invest­ment and even real end user demand, along with the drying up of local funding combined to push the UAE property market into recession and the economy to slow down.

The impact on real estate developers’ income was all the worse, however, because of the sector’s structural deficiencies. Their weaknesses were anchored in the way the sector had evolved over the previous years, characterized by:

1.      Expanding everywhere, with unfo­cused market strategies: Most developers rapidly expanded their operations along three axes: the value chain, geography, and property segments. However, such an approach lacked long-term rationale, resulting in a clear financial cost.

2.      Rushing to Deliver, Neglecting Value Creation: The intensity of the UAE real estate boom provided developers with only limited opportunities to build commercially driven capabilities, the essential source of competitive advantage. However, most companies were not structured to allow them to maintain focus on commercial aspects of their activities throughout the development cycle, and many firms did not possess development and asset management capabilities sufficient for maximizing value creation.

3.      Having Volatile Revenue Streams and Insufficient Risk Management: UAE developers targeted quick, high-margin returns from developing and selling mostly residential assets. The result was that UAE developers became highly dependent on asset disposals, which are one-off transactions involving considerable risk.


Following such a major market shock, MENA developers should rethink the fundamentals of their sector. With the real estate development market in the region still maturing, they need to build strong foundations that can deliver sustainable value going forward.

In order to favorably position themselves for the coming recovery, real estate developers should refrain from adopting all the approaches of similar organizations in more mature markets. Instead, they should learn from these international comparisons and rework their strategies in four customized ways:

1.      Refocus Value Chain Coverage to Reflect New Developer Identity

Developers should clearly define their primary value creation strategy along the real estate value chain. This process begins by identifying which type of real estate developer they want to be. There are three broad profiles to choose from:

  • Master developer: Typically acquires large parcels of land, develops the required infrastructure and services, and then sells most of the plots to sub-developers
  • Property developer: Buys serviced land from master developers, develops new properties or repositions existing ones, then sells or lets the properties with direct or indirect involvement as the property manager
  • Full-fledged real estate developer: Does everything develops land infrastructure and properties, then sells or leases these assets directly or indirectly as the property manager

The nature of the market to an extent drives the choice of profile and the capabilities needed to succeed. In effect, it is important for developers to determine their identity, because each of these profiles requires a distinct set of capabilities.

 2.      Know the Market; Identify Attainable Areas of Growth

Developers need to have in-depth knowledge of their core market and a realistic sense of what opportunities are within reach. This will help them comprehend where they stand in terms of the real estate cycle and its related property prices. This, in turn, should also allow them to adjust their strategy and resource allocation accordingly.

They should then follow three guidelines to determine their geographic, property segment, and property class strategy:

  • Do not expand prematurely beyond the local market
  • Start narrowing segment coverage and only specialize in one or two segment types over the long term
  • Consider entering underserved property classes

 3.      Be Ready for the Next Downturn: Balance Revenue Streams and Risk Taking

The third way that real estate developers should rework their strategies is by ensuring that their business models strike the correct balance between easy short-term returns and long-term hedges. “Developers should rethink their portfolios and pipeline of projects – and balance between building assets to sell and monetize versus building assets to maintain for the long term – to secure a safety net against the next down cycle,” added Majdalani. “Boards should also intervene by setting and monitoring, if required, financial metrics to ensure that the organization can survive a market downturn.”

Furthermore, board members and senior executives should work together to determine the boundaries of a risk–return profile that is acceptable to shareholders and investors.

4.      Keep an Eye on Value Creation

Finally, for developers, the correct set of core capabilities should be the few that help them deliver sustainable value for shareholders. Developers must therefore focus their efforts on profitability, and move from being a design- or delivery-focused organization to one that is value-focused.

“In the future, it will become more important to construct the most profitable assets, and then actively manage them to ensure con­tinuous value creation,” said Sfeir. “Being commer­cially strong will be more imperative than being architecturally appealing. Moreover, by focusing on attractive and attainable opportunities, and delivering risk-adjusted projects well, firms can develop the differentiating capabilities that lead to success over the longer term.”

Despite the far-reaching consequences of the real estate market collapse, it remains a booming sector in the MENA region today. This is because property is still considered the preferred asset class for investors. In line with this, developers still have substantial opportunities to both attract capital and create value. Also, there are still gaps in the market, with underserved segments and classes in every geographic area. In truth, the cyclical nature of the property business means that the next surge and bust are inevitable. For developers, now is the time to reconsider business models and value creation strategies. As the MENA region proceeds through the real estate cycle, developers must identify the core and differentiating capabilities that they need to develop to be able to play and win in their respective markets.

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