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For investors looking for affordable entry points into the real estate market, buying off-plan is a practical route. With a price difference of up to 20 per cent, off-plan is certainly more attractive than ready property for most new investors. Ready property, however, has its own advantages, not the least are the bigger, immediate return on investment (ROI) and strong price appreciation in the long term, according to a recent study, which claims that completed properties could enjoy up to 20 per cent bigger returns compared with off-plan investment.
Sameer Lakhani, Managing Director of Global Capital Partners Group, which conducted the study, says off-plan is lucrative mainly for investors who quickly resell or flip the property for profit. “That is prominent in a rising market, where a buyer’s ability to flip an off-plan property is a lot better,” says Lakhani. “Ready property brings long-term investors the same or even higher total returns than off-plan. This study is not only for Dubai, but applies to any property market in the world.”
The report, Dubai: All the Returns We Cannot See, which was jointly conducted with Reidin.com, examined price appreciation and conducted total return analysis (TRA) of price appreciation and rental yields between off-plan projects and ready property in the Greens and the Palm Jumeirah. “We evaluated price appreciation and TRA of a ready property, Views, and an off-plan project, Panaroma, both in the Greens community,” says Lakhani. The study also looked into the investment performance of Palma Residences, a completed project on the Palm Jumeirah, and compared it with the community indices on the island. “In both these communities, price appreciation and TRA of ready property were at par or out-performed the individual off-plan projects.”
Adding rental earnings to price appreciation, a long-term investor at the Views would gain 20 per cent more TRA than Panaroma, according to Lakhani.
Furthermore, if the flipping element was removed from the purchase of an off-plan property, long-term investors, who hold a ready property for three to seven years, will earn more from their investment.
“Moreover, we also believe investment in mid-income property brings higher TRA than the trophy segment because even as of today, the market still seems to be focusing on delivering more prime property compared with the mid-income segment,” says Lakhani. “Hence, we stipulate that it still makes more sense to invest in mid-income, affordable property because this remains undersupplied, even in the near future.”
Choosing between ready and off-plan depends on a buyer’s cash flow, says Pawan Batavia, Director at Synergy Properties. “If a purchaser wants to pay slowly in installments, off-plan is a better option, and if a buyer has full money to invest, we suggest to invest in ready property, mainly due to immediate gain from the rental income and the uncertainty of delays from developers.”
Helen Tatham, Managing Partner of Prime Places Real Estate, agrees that an investor’s financial capacity should play a crucial role when deciding between off-plan and ready property. “Some investors feel comfortable making payments by installment for off-plan property, whereby there is less money tied up, with the objective to secure a brand new property in high demand for sale or rent.”
Hence, a payment plan with a significant percentage payable on completion is most attractive as any capital gain on handover will account for a higher ROI than a completed property over the same period, says Tatham. On the other hand, ready property paid in full will offer the benefit of a rental income immediately, yielding between 4 per cent and 10 per cent, depending on area and segment. Add this to any capital gain and there will be a very positive return for the money invested in that period.
“An investor would ideally want to see at least 10 per cent capital appreciation on an off-plan property, because if the same money were spent on a ready property, it would yield him 5 per cent net per year,” says Tatham. “Hence, a payment plan with a high percentage payable on completion means that the ROI would be greater than 10 per cent if sold at that level. Look at rental rates in the area and target a net yield of at least 7 per cent, thereby making an allowance for a drop when the unit is handed over given new supply.”
Her advice to investors is to study the supply-and-demand situation of an area — check occupancy rates and what other projects are due to be handed over. Investors should also determine how long they want to be invested and how liquid the property should be, as this will reflect on its value in the long term, says Tatham. “Choose a project, whether off-plan or ready property, that is in a desirable area with limited alternatives so rental demand is high. Make sure that you can afford the total cost of the property and do not commit to anything beyond your budget,” she says.
Tatham believes the best rental yields are achieved with lower-priced properties. “Majority of residents seek the best value when renting a property. Therefore, there is high demand. Service charges, which have to be netted from the total rent, tend to be lower for the more affordable housing and older properties and invariably incur more maintenance costs, so these factors should be taken into consideration when looking at overall yield. Properties that are well kept and upgraded in any way will attract a better tenant who is less likely to move out, hence fewer void periods.”
Tatham admits that off-plan is popular, particularly in the run-up to the World Expo 2020. “Prices are favourable at present, so it is likely to see an upside to prices on completion in two to three years’ time,” says Tatham. “Payment plans have also become more attractive to encourage purchases, but be cautious about unknown developers with no track record.
“Moreover, even ready properties are still producing very high yields compared with other global markets. With no income tax in the GCC, investors can benefit from a thriving city that is tenant-centric. In the next two to three years, while we can measure new supply, investors should be able to make a safe decision about buying property that is yield producing without risk.”
Suraj Rajshekar, General Manager at Rocky Real Estate, says a property at the right location and with good valuation is always a sound investment. If it is a ready unit, the buyer generates steady income whether the market goes up or down, but not with off-plan, he says. He says a property investment can only become profitable when the valuation is right. For instance, in 2013-14, developers started accelerating prices but today those rates are not realistic. Properties in Downtown Dubai at that time were sold at Dh2,500-Dh2,700 per square foot, whereas in the same location now the valuation is Dh1,600 and lesser for off-plan, he says.
“The formula for successful investment is to buy the right property that runs fast, i.e. studios, one-bedder and two-bedder, at the right location and valuations that are realistic. This way you are sure to make gains on your investment, irrelevant of the market conditions,” he says. “In the case of an off-plan purchase, the developer also matters. If the developer does not complete and deliver on time, people will not be able to reap significant benefits as desired.”
Ashirwad Somani, Chairman of Candour Properties, however, points out that property appreciation can be unpredictable. He advises investors to look at an investment with a seven-year cycle. “There is a very good chance of having an appreciation of up to 30 per cent annualised,” says Somani. “Usually, I advise my investors a 30-35 per cent compound annual growth rate in profit. The average is much below that, so it always proves to be a safe exit. For ready property, yields are between 7-10 per cent depending on the location. Off-plan or soon-to-be ready properties are looking at up to 14 per cent if you can look deeply into the market.”
Hence, Somani advises investors to look at each investment as a financial model that is going to take cash flow for few years and give income for the following years.
Source: Hina Navin, Special to Property Weekly