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The last two years have seen property prices in many areas dropping considerably as a result of various factors. Experts say this is in line with a market natural cycle as Dubai’s property market enters a stabilisation phase following several quarters of sharp growth. While industry pundits say this is ultimately a healthy sign of maturity, the price corrections have also created plenty of opportunities for both investors and homebuyers with several properties selling at discounted prices.
Many distressed properties, in particular, have emerged in the market offering properties that otherwise would be beyond the reach of most buyers. However, given the unique attributes of such properties, experts warn it is important to understand the characteristics of distress sales and the fine print of any deal.
“When property sells at a significantly lower price than the market, it is a distressed asset,” explains Declan McNaughton, Managing Director of Chestertons UAE. “Distressed assets rise during economic uncertainties, when investors need to cash out due to debt obligations. They are usually cash deals.”
While such deals tend to rise in number during an economic downturn, the market usually will have a few heavily discounted properties available throughout the year from sellers who need immediate funds, says Deepika Grover, Managing Director of Emirates Realty, a property consulting firm. “Distress deals are available in both high and low market scenarios as they are more dependent on individual needs and urgency rather than the overall market scenario,” says Grover. “People who want to liquidate the assets they own at the time of an urgent requirement of funds do so at a lower-than-market price to get the money immediately.”
Buying distressed assets
Distressed assets are normally available on various property portals. These listings are flagged as distress sale and usually provide basic information about the community, the area and price. Experts say the price differential between a distressed property and a normal listing can be as high as 75 per cent, but those are rare and hard to come by.
Recent distressed property listings on some property websites include a 14,000-sqft, six-bedroom villa in Emirates Hills at a price of Dh26 million, which is more than 23 per cent cheaper compared to a similar-sized property in the same locality being sold at Dh34 million.
At the Arabian Ranches, a distressed property measuring 3,200 sq ft is being sold for Dh3.5 million, while a normal listing offers it at Dh3.9 million.
Specific attributes of each property account for the price variations, so experts advise to understand the price break-up and details before entering into a distressed property transaction. In Dubai Marina market prices range from Dh1,500-Dh2,200 per square foot depending on the building’s attributes, view, location and other factors, although Grover says there are a few that are being sold at Dh1,100-Dh1,200 per square foot.
Grover adds: “In Jumeirah Lakes Towers, property prices are between Dh1,100 and Dh1,400 per square foot, but there are a few distressed property sellers in the market offering inventory at Dh800-Dh1,000 per square foot. These deals are not available in bulk and very few such deals are available.”
She also cites a recent case where an apartment owner in Downtown Dubai listed the property for less than Dh1,400, when prices there start above Dh2,000 per square foot.
Buyers are also likely to secure bargain prices at property auctions. It is usually banks that auction such properties, although banks in the UAE have been less than forthcoming in offering this option for distressed assets. The number of homeowners defaulting on mortgage repayments rose following the economic downturn in 2008-09, which saw property prices in Dubai decline by more than 60 per cent.
The 2008 Mortgage Law No. 14 set out rules for default, foreclosure and repossession and after conducting foreclosure auctions under those terms, the Dubai Land Department (DLD) halted these proceedings. Banks focused on renegotiating the terms, using foreclosure as a last resort and the DLD moved foreclosure auctions to private auction companies such as EmiratesAuction.com, which continues to offer distressed properties for sale.
Sellers of distressed properties are either investors who have taken out mortgage to buy the property or a fund that has bought the property independently without borrowing money. In the case of the former, the fund/company can put up the unit for sale as a distressed asset through a real estate agent or even independently. “People who want such properties should register themselves as a buyer with multiple brokerage agencies, giving their target price for the location they are targeting,” says Grover.
Also, if mortgage is involved, the owner will be able to initiate a sale only if there is no missed payments, or the sale price will be enough to clear pending debt payments. If the owner decides to sell the unit at a price lower than the outstanding debt, then such a transaction will require an agreement from the lender.
Grover also suggests that advance payment should be kept to a maximum of 10 per cent and should be handed over to a registered real estate agency. Since these are distressed property deals, it usually does not take time for the property to be transferred to the buyer. “Potential buyers should keep cash or loan from bank handy as such sellers are unlikely to give time for payments given their urgent need for funds,” explains Grover.
Buyers are also advised to proceed in a timely manner in such deals, as the sales terms could easily change. Given the nature of the sale, the seller is likely to be in dire need of finances and there could be a risk of bankruptcy before the sale transaction goes through. Thus due diligence is also necessary.
McNaughton says understanding the fine print can help reduce the risk of unforeseen consequences down the line. “The ownership should be examined carefully for such transactions as the claim to property might be disputed,” says McNaughton. “All the legal documents should be screened by a qualified lawyer to ensure that everything is proper and adheres to the local laws.”
For instance, a completed property needs to be checked for legal ownership in terms of the title deeds registered with the DLD. If it is an offplan unit, then the registration in the seller’s name may be pending though it should still be preregistered by the developer. In such a case, if all payments have been made and the seller has obtained a no-objection certificate from the developer, then the sale is legally permissible”
Investor interest has moved towards bargain and distressed properties even as residential values continue to soften. Cluttons’ Dubai Residential Property Market Outlook Winter 2015-16 revealed that values for both apartments and villas marginally dipped during third quarter by 0.8 per cent and 0.5 per cent respectively, marking the fifth consecutive quarter of price falls, with further decline of 3-5 per cent expected during the next 12 months.
Buying a distressed property may be great, but the bargain comes at the cost of doing thorough due diligence on the legal terms, the seller’s background and having adequate insurance to cover any losses that may be incurred if things go awry.
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Source: Manika Dhama, Special to Property Weekly