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Developers continuously re-engineer payment schemes to suit market conditions, offering a combination of pre- and post-handover deals. A report published in the third quarter last year by Reidin and Unitas Consultancy, The curious case of payment plans, reveals how payment terms have been repackaged.
Over half (55 per cent) of off-plan projects in the second quarter last year had payment plans skewed towards completion, compared with 29 per cent two years earlier, according to the report. The number of projects offering 25-49 per cent payment upon completion also doubled since 2013, while those with post-completion terms doubled since 2014. Still, around twice the number of projects surveyed require 50-100 per cent payment on completion.
“We’ve seen some very attractive payment plans over the last two years, and they still exist today. However, there are only relatively few developers who can do that, because they require a lot of equity to finance construction without relying on pre-sales,” says Matt Green, Head of Research and Consultancy at CBRE Middle East.
He refers to plans that allow a 10 per cent down payment, then 30 per cent over the two-year construction period, followed by a lump sum on or after completion.
Payment plans on offer
Dubai Properties, for example, has been offering a payment term that requires 40 per cent during construction and 60 per cent on handover, while Aldar has been going for a 30-70 recipe for its developments in Abu Dhabi.
At the Dubai Hills project, jointly developed by Emaar and Meraas, the payment plan for the Sidra Villas has been recently extended to five years, allowing 40 per cent to be paid over two years after handover.
“These plans would also make it easier to obtain mortgage towards the completion of the property,” says Green says. “From an investor point of view, this is very attractive, and probably becomes the driver for some of the purchases, rather than just being purely based on a square foot basis.”
Developer G&Co went a step further on its Jade and Viridian at The Fields projects, allowing for only half to be paid by handover, and stretching the other half over two years after moving in.
GGICO is offering 2 per cent monthly payments stretched over three years at its Grand Horizon project in Dubai Sports City. For developments under construction, the developer has turned the 70-30 formula on its head, offering buyers to pay 30 per cent by completion and another 70 per cent post-hand-over over three years, or 2 per cent per month.
MAG PD, meanwhile, is likening instalments to rental payments, offering a five-year payment plan at zero interest for its MAG5 Boulevard in Dubai South.
Danube Properties came up with a different take yet again for its Glitz projects. Buyers pay a total of 35 per cent within the first two months of purchase followed by 1 per cent monthly payments. The buyer would have paid 52 per cent until completion and the remaining instalments for another 48 months after handover.
“Developers are adjusting to what people can afford. Payment plans are more catered towards the working class,” says Abdul Basset Be-traoui, Managing Partner at Land Sterling.
Sweet or risky deals?
While these bite-sized periodical payment plans are lucrative for buyers, they come at a risk for developers.
“In feasibility terms, developers would rather have more payment up front. It’s just a tactic to sell during periods that are more challenging, like now,” Green explains.
In the case of Danube and other private developers, such as MAG PD, the fact that they are not solely relying on the income from developing — they are part of larger groups engaged in other businesses — makes it possible to self-finance projects and mitigate risks.
“Yes, it is a huge advantage, not just commercially but also helps us keep direct control over the quality and supply chain of building materials,” says Rizwan Sajan, Founder and Chairman of Danube Group. “Since it is our in-house business, it does not come as direct outlay to a third party.”
Sajan says he is not concerned about a deferred payment plan risk, as long as a project is developed with sound financial backing and robust planning.
“We have factored the payment plan into our project cash flow right from the feasibility stage,” he says. “We do not launch a project if we do not have a contingency plan to ensure project delivery.”
With Danube’s payment plan, one could buy a studio for monthly payments of Dh4,100-Dh5,000 and a three-bedroom apartment for Dh14,000.
“In the absence of convenient property mortgage facilities, we decided to offer extended payment plans, helping real property buyers to own their homes in Dubai,” says Sajan. “It has helped us associate with serious buyers, while keeping away the speculators.
“Our offering has also coincided with the govern-ment’s initiative to promote affordable homes.”
Developer Binghatti offers a more traditional 20 per cent down payment, followed by three monthly instalments of 10 per cent and the rest on handover.
“It all depends on your business model,” says Muhammad Binghatti Aljbori, CEO of Binghatti. “If a developer offers very low instalments, the first thing [that] buyers have to look at is when they are going to get their property — within 11 months or later? End users want their property fast.
“If you’re paying less it is obviously going to take more time. If you pay more, the payment plans aren’t some of the easiest, as in our case, but we’re fast with completing projects. That means quicker return on your investment.”
Less risky alternative
Niall McLoughlin, Senior Vice-President of Da-mac Properties says Da-mac avoids longer payment terms mainly to reduce risk. “We would never do a plan where you’re paying for five years after you’ve moved in, because who is taking the risk? The developer has to build this. We believe we can sell products through other means,” says McLoughlin.
However, he concedes the concept depends on the business model and may work for smaller developers, but not for Damac’s 40,000 units under development. The developer’s standard business model requires paying up 40 per cent in the first six to nine months, and the balance over the construction of the unit.
“Dubai is predominantly a non-mortgage market and it fits the 50 per cent loan-to-value regulation for off-plan,” says McLoughlin. “From a financial perspective, a business model with everything paid by completion works well for us. It’s a risk we’re comfortable with, although we may deviate on the percentages during certain periods for certain products.”
Source: Nicole Walter, Special to Property Weekly