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Most properties in the UAE's young real estate market, especially Dubai, are newly built and there are tens of thousands of homes in the planning stage or under construction. Many buyers who are determined to acquire a home are attracted by the opportunity to buy off-plan because it is normally the point when the property is the cheapest.
The off-plan buyer, in fact, does not purchase the property, but the contractual right to take possession after its completion. A deposit and monthly or quarterly instalments are paid until it is ready to be handed over. This method is actually a good deal for both the buyer and the developer because the latter can, to some extent, leverage the financing risk in the construction phase.
''Off-plan sales emerged as the major source of finance for residential real estate development in the UAE in the previous [market] cycle as developers recognised the ability to tap into this source of funding for proposed projects,'' Craig Plumb, Head of Research — Middle East and North Africa at JLL, tells Property Weekly. However, there is also an inherent risk. For in stance, buyers and investors cannot always assume that a property will be ready at a date promised by the developer. The UAE government has now taken precautions to prevent developers from abandoning projects and defaulting on loans, but there was no such safety net in the previous cycle in Dubai.
''As the market was immature and not widely regulated in 2006 and 2007, developers were able to attract funding from anxious investors, some of whom were taken for a ride by less scrupulous developers who failed to deliver projects on schedule, or sometimes at all,'' says Plumb. ''The widespread use of off-plan sales was a major contributing factor to the collapse of the market in 2008 and 2009.''
Flipping, the practice of quickly reselling off-plan property for profit, has been a major issue. Some investors resell with significant profit long before completion and after paying only the minimum deposit. In its heyday, this method could generate substantial profits that could go up to three-digit figures in just days, if not hours, after the contract was signed. As a result prices went through the roof as properties were sold a number of times before they were even close to completion in a market that went gaga.
The government has taken steps to cool down the speculative drive by introducing regulatory measures, including a mortgage cap and raising the registration fee. Most developers no longer allow the resale of off-plan property before completion unless buyers pay at least 40 per cent of the price. Today, the market seems to have normalised in terms of flipping and has returned mainly to the end users.
A report by real estate consultancy Cluttons says that despite the fall in the overall level of transactions in Dubai last year, the off plan sales market has, for the most part, retained its momentum, but with investors taking a long-term view. Cluttons even expects more off-plan property sales this year from leading developers and some smaller companies. ''Many buyers now view off plan property as good value,'' says Steve Morgan, CEO of Cluttons Middle East, adding that Dubai's off-plan residential sales market is still buoyant and continues to attract regional and international investors.
The report also notes that investment appetite continues to be strong, with investors keen to free up capital to move on to their next purchase. ''We are seeing nearly four out of five transactions being refinanced once buyers have met developer restrictions, if any, on the transfer of title deeds,'' says Faisal Durrani, Cluttons' International Research and Business Development Manager.
''As the market continues to adjust to the changes in the financing landscape, we expect the gradual softening in values to persist over the next three to six months,'' says Durrani, adding that he has noticed ''a maturing attitude in investors who are taking a long-term investment perspective''.
For example, despite developer Emaar reportedly restricting the resale of off plan units until handover, its first tower at Dubai Creek Harbour, which is expected to be completed in 2018, has been sold out. Developer Damac Properties also believes the off-plan market now benefits from much stronger fundamentals.
''2014 proved to be a pivotal year for the industry where off-plan sales continued, despite changes such as stricter mortgage regulation and a doubling of the assignment fees,'' Niall McLoughlin, Senior Vice-President of Damac Properties, tells Property Weekly. ''This shows that there is a fundamental belief and confidence in Dubai for the coming years. The off-plan real estate market remains strong, especially at the luxury end, with overseas buyers looking to purchase a second home in Dubai.''
He also points out that the investor sentiment has obviously changed.
''Many investors in off plan property are looking at long-term capital appreciation on their assets and they would only do this in a location that has strong fundamentals in place for the long term,'' says McLoughlin.
''Dubai's property market was recently ranked the strongest in the world by the Global Property Guide, increasing 13.46 per cent on the index last year, and we expect the off-plan market to remain one of the most popular in the world in the coming year.''
Even though the level of off-plan sales is lower compared to pre-2008 levels, they remain a major source of funding for developers in both Dubai and Abu Dhabi, says Plumb. However, exact data on the market is hard to come by.
''There is no comprehensive data on the level of off plan launches,'' says Plumb. ''Neither on prices for units sold off-plan because these transactions do not get registered in the Dubai Land Department systems until the properties are completed.''
JLL estimates about 25,000 units were launched last year for sale in more than 85 projects that were not yet completed. ''All the major Dubai-based developers launched projects on a presale basis last year, with Emaar being the most active with 13 separate developments,'' Plumb says.
In the past year, there has also been strong interest in off-plan luxury property, driven primarily by Chinese buyers, as well as from investors in Singapore and, before the rouble crisis emerged, in Russia. ''There clearly remains investor appetite for off-plan sales, particularly for projects launched by more reputable developers,'' Plumb says.
''From an investor's point of view, developers offer more attractive payment terms and a smaller down payment for off-plan projects than for the purchase of an existing unit. While the payment plans vary significantly between developers, a typical down payment can be as low as 10 per cent of the total unit value.''
The changing sentiment in the off-plan market towards end users and long term investors has also made the business safer than it used to be. Developers are now required to put all the proceeds from off-plan sales into an escrow account and use the monies only after certain agreed milestones in the development have been reached, as it is common in mature real estate markets in the West.
As many developers no longer allow the resale of a property unless a specified amount is paid, off-plan buyers should take this into account, especially when bank financing is involved. Some reputable developers will be able to help with the financing of an off-plan property transaction, albeit at lower loan-to-value ratios than they used to be.
Real estate prices were on the rise since the recovery began in 2011 and spiked in 2013, but cooled down last year, especially after the slump in oil prices.
There is still growth in the market, but at a slower pace, as it is now seen to be going through a maturing cycle. This isn't necessarily a bad thing because, although growth slows down, a mature market lets sustainability increase. This situation is expected to prevail in the period ahead of the World Expo 2020, supported by the government's cooling measures, self-regulation by developers and the newly found long term approach of investors.
McLoughlin says buyers have a ''strong belief'' in Dubai, its economy and future prospects. ''Dubai is built on the premise of strong trade networks, a thriving tourism industry and easy, open business. These have not changed and, in fact, the emirate is growing in all of these areas, with tourism set to double in the coming five to six years to more than 20 million visitors annually,'' he says. The World Expo would provide more than 150,000 new jobs and the government is confident of running a budget surplus until at least 2019, McLoughlin points out.
''All metrics suggest that Dubai is set for a period of stable and sustained growth,'' he says. ''Given these positive signals, overseas investors are enthusiastic about the luxury off-plan real estate market.''
A maturing market is also more likely to be able to deal with the massive pipeline of new property for the coming years. Many developers, after regaining confidence, have resorted to completing projects that have been put on hold during the global financial crisis and also launched many new ones.
Real estate advisory firm CBRE estimates that the market will have to be prepared for the release of around 55,000 new units by 2017, of which one-third will be completed this year.
But stability seems to be the new buzzword in the Dubai property market, with Mohammed Alabbar, Chairman of property giant Emaar, quoted saying earlier this month that ''efforts of the Dubai Government have helped manage the supply pipeline'' and keep demand ''healthy'' even though some forecasts expect a further softening of the market, although not a dramatic one.
UK-based property consultancy Knight Frank, for example, believes that price declines of up to 10 per cent could be possible this year in Dubai.
Plumb is of a similar opinion and thinks that this will help the market cool down further. ''The average price for residential units in Dubai increased by around 20 per cent last year,'' he says.
''But most of this increase in price was experienced over the first six months of the year, and there has been little further growth in recent months.''
He adds that JLL expects this situation to likely continue this year, with the market experiencing stabilizing prices or a relatively modest decline of up to 10 per cent.
A stable market also gives a different complexion to the off-plan sector.
''In general terms, there seems no reason for off-plan sales to continue experiencing increases when prices of completed units are stable or declining,'' Plumb says.
Here are the factors to consider when buying off-plan property
Source: Arno Maierbrugger, Special to Property Weekly