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Al Mazaya Holding’s Weekly Real Estate Report

Amidst International and Regional Cooperation

Real Estate Markets’ Resistance to Money Laundering Operations Depends on Foreign Investment Laws

Real estate markets at times undergo a state of continued or sustained high prices, even in cases of recession and decline in the value and volume of real estate sales. It also becomes commonplace for the value of real estate transactions to rise to unprecedented levels, while the funding of channels and developers faces further challenges and difficulties. Moreover, the exceptional attractiveness of real estate projects and products and safe havens may have a role in continued demand for both turnkey and under-construction products, thus raising the liquidity values.

Furthermore, money laundering operations also have a considerable role in raising the sector’s liquidity. The growing number of projects and the continuous rise in prices helps raise liquidity values in the real estate market—a matter which mostly carries erroneous performance indicators that create real estate bubbles detrimental to the real estate market when these funds begin to leave the invested places. Therefore, money laundering operations are considered amongst the most serious matters facing the real estate market in the world, given the degree to which the market differs from other sectors in terms of its importance.

Al Mazaya Holding’s weekly real estate report points out that only crises are able to reveal the truth of what is occurring in real estate markets. In this context, money laundering operations often target the real estate sector in most countries all over the world, and focuses particularly on the luxury market and a distinct category of real estate characterised by high investment values as well as liquidation, with an emphasis on sales and purchase transactions that are carried out by foreign companies—a matter which grants them further legitimacy.

Al Mazaya’s report points out that the British real estate market is considered one of the most active real estate markets in terms of closing deals that stem from unknown sources, which are most likely a result of money laundering. This comes at time when real estate prices are at an all-time high and there is a noticeable rise in the prevailing liquidity values, as well as a high number of foreign companies that own luxury real estate in London in particular. Governing laws and legislation play a role in the control of these operations as well as the reduction of their destructive impact on the real estate market and domestic economy in all applicable countries.

Uncovering these transactions and operations in all markets around the world is quite simple, as is pursuing them and determining where they are most prevalent, should laws and legislation governing foreign investments become available. This in turn leads us to believe that the markets which adopt investment laws open to foreign investment will be more vulnerable to the trends and goals of the owners of these funds, in spite of all the negative aspects and risks surrounding real estate markets targeted by this liquidity. Furthermore, these operations are seeking to form real estate markets and also contribute to raising prices several times over, reaching an unparalleled level that makes it no longer possible for the middle class to afford decent housing. Additionally, the flow of these funds into the housing market will have unlimited consequences, and the unjustified continued growing prices of real estate will be one of the most direct and negative impacts. Al Mazaya’s report affirms that money laundering operations mainly target the economies of developed countries which enjoy internationally influential financial positions and have advanced accounting and legal services; however this attractiveness collides with the possibility that a successful economy can be turned into a home of corruption and crime.

Al Mazaya’s report points out that real estate markets in the region are still safe from the direct impact of money laundering operations, and maintains that some of the region’s markets have been adversely influenced by such operations during the pre-global financial crisis period. Moreover, the demand trends adopted by the end user and reported diversification on sales and real estate transactions in the majority of the region’s markets, besides the gradual cutback reported by the prices of real estate units for nearly two years and the discipline reflected by real estate exhibitions, are indicators which substantiate that real estate markets in the region have a high transparency level and are free from the effects of money laundering. On the other hand, the continued rise in the price of land and turnkey real estate products in a number of the region’s markets is attributable to internal factors, the foremost of which is the low number of real estate products in high-demand locations, the lack of suitable land for the establishment of real estate projects, and the reported large-scale speculation over the past period, which came as a result of high domestic liquidity in the possession of individuals and companies seeking rapid investments and large returns.

This report looks forward to more transparency, laws and regulations that govern the real estate market’s performance in the region, particularly during the current and upcoming periods, amidst an increase in the indicators of liquidity scarcity and forecasts; this indicates a decline in the banking sector’s desire to pump more liquidity at the level of projects and direct retail financing according to the level of risks that is reported and expected from time to time. It is relevant here to point out that the continued cutback in capital markets and the decline in investment opportunities both quantitatively and qualitatively would encourage money laundering transactions to spread through and penetrate the pillars of local economies and their major sectors, especially the real estate sector and capital markets.

Al Mazaya’s report is looking forward to further coordination and cooperation among all relevant official parties for raising the efficiency of tracking suspicious transactions entering the economy and its influential sectors. Meanwhile, investment in the majority of the region’s countries depends mainly on real investments aiming to achieve intermediate and long-term development plans and objectives, the success and failure of which are based on the level of governmental support and continuation in development projects; the region’s markets therefore can’t bear new crises and unforeseen sharp price cutbacks. In this context, Al Mazaya’s report points out that any delay in regulating the profession of real estate brokers, offices, agencies and real estate companies is expected to keep the door wide open for closing transactions based on suspicious sources of funds, and these issues are not separate from applicable measures that help maintain the real estate market’s discipline and eliminate deviations wherever they may be. Al Mazaya’s report adds that imposing more oversight and control over transactions produced by  real estate exhibitions also falls within the procedures of the market discipline and raising efficiency and transparency, which would lead to raising the investment attractiveness of the market for capital and real investments, and would protect the assets and interests of individuals and companies, be they, in the long run, end users or investors.

The report further asserts that precautionary measures at the local level may be beneficial and play a key role, yet they are not adequate and can’t be depended on if not accompanied by an international consensus to take strict measures to prevent the flow of suspicious funds into all major sectors, including real estate. It seems that many of the region’s countries have become more prepared to address this phenomenon through further relevant laws and through adopting more market-controlled laws and regulations. In conclusion, minimising the impact of money laundering on the real estate sector and other major sectors primarily requires further cooperation among the region’s markets, and secondarily among the world’s markets in general.