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Keep buyers in mind. This seems to be the prevailing attitude of many brokers as the real estate market undergoes another major transition following successive years of strong growth. During a recent site visit at the Mohammad Bin Rashid (MBR) City — District One development, visitors were shown show villas along tree-lined streets, neighbourhood retail centres, a lagoon and many other amenities — underlining the quality of life the high-end project promises to offer. PNC Menon, Founder and Chairman of Sobha Group, the project's developer, says a high percentage of potential buyers come to view the property with their families.
In contrast, a typical buyer a decade ago would probably never get to see the project, much less show interest in its amenities. The buyer would get the mortgage sorted, perhaps pool together like-minded investors, settle the down payment and then sell the property at a profit some months later.
''Earlier people were not worried about lifestyle. They just bought off-plan with a phone call,'' says Zarah Evans, Managing Partner of Exclusive Links Real Estate Brokers. She says there has been a complete turnaround as buyers have now become more cautious.
''We see more people coming back to the buy to-live market,'' says David Godchaux, CEO of property consultancy Core Savills, Dubai. ''The quality of developments is becoming more resident friendly. Developers are trying to promote facilities, which was not the case several years ago, when properties were built for the investor. Today you have a focus on lifestyle. This is in any case better for investors because it adds value.''
Analysts say first-time buyers are crucial to any real estate market and there are several reasons developers want to tap into this segment.
''First-time buyers stimulate the real estate market in any economy in the world,'' says Sameer Lakhani, Managing Director of Global Capital Partners.
Lakhani agrees many developers are now are catering to end users. ''In 2002-08 and then from 2011-13 there was so much speculative buying that it made sense to cater to investors,'' he says. ''Now with measures in place and macroeconomic factors affecting speculative investors, end users are the most likely buyers.''
Reaching the end user
Regulations have done a lot to curb speculative buying and thereby indirectly open the market to homebuyers. While it has introduced regulations such as increasing transfer fees from 2 per cent to 4 per cent and the mortgage cap, which limits the loan value with every subsequent property purchase, the government is aware that long-term interest in the market is dictated by risk appetite, tempered with caution. It is not accidental that from being a cash-dominated market with mortgages accounting for only about 20 per cent of transactions a couple of years ago, the share of mortgage has been increasing. In the first half of 2014, around 43 per cent of transactions were through mortgage. In the first half of last year, mortgage accounted for 52 per cent of transactions.
Godchaux says the stricter rules and regulations since 2008 and the bigger amount required as down payment are mainly designed to regulate speculative activity in the market.
''On the other hand, low interest rates are attracting more homebuyers. Interest rates are not going to stay low and a lot of investors and homebuyers understand that this is the right time to invest — even though in Dubai the rates are not fixed over the mortgage period, so you are exposed,'' says Godchaux.
Population growth is also contributing to the market dynamic. The UAE is a regional hub for many large corporations, while expats with long and medium-term plans of living here comprise a sizeable chunk of the market. ''The first investment is the easiest [when you invest] where you live,'' says Godchaux. ''It's a controlled risk. If things go wrong, you know the exit strategy, you have a network. You buy locally. It is also easier to secure better financing. That impacts the profitability and rate of return. It's cheaper to buy where you live.''
However, first-time buyers are affected by the loan to-value ratio (LTV). Jean-Luc Desbois, Managing Director of mortgage consultant Home Matters, says the mortgage cap being reviewed for first-time buyers would affect the market positively. ''The cap has been successful but first-time buyers have been affected the most,'' says Desbois. ''We have spoken to them [the UAE Central Bank] about reviewing the cap. They are open-minded to potentially increasing the LTV for first-time buyers in future. That, if it happens, will be a welcome initiative. We need more affordable housing and we need to make it easier for the first-time buyer.''
Developers are keen to address the needs of this market by creating easy payment plans. ''Developers are doing tie-ups with banks, which is another criteria for stimulating demand. End users are not flush with cash. So there is a greater preponderance of developers trying to get their property approved. Developers are giving buyers their own finance — even 10-year plans,'' says Lakhani.
Developers are keeping tabs of new buyer behaviours and recognize that this is now a buyer's market. ''Between 2000 and 2008, at the peak and even when the market experienced difficulties, it was supply-driven,'' says Sunil Gomes, Director Commercial of Nshama. ''It was an investment-driven market. However, Dubai is about lifestyle now. Retirement planning, tax planning are all a part of it. People stay longer — even the average tourist stay which was 1.7 days is now four days. It is no longer just an investment-driven market.''
A fussier buyer
Homebuyers have also now become fussier. ''End users are longer gestation buyers. They will look at neighbourhoods and a whole bunch of variables in buying a home,'' says Lakhani. ''Investors look at yields and capital. End users look at hospitals, schools and parks. End-user sales take longer.''
So what is the buyer looking for? Gomes says, ''When buyers look at a product, they look at the facilities — gym, squash court, etc — and the environment. We define the product and facilities that go with it. For instance, communities might be anchored by a park, which is a huge facility for residents and visitors and not revenue generating. Parks in Dubai are getting busier and busier and it's an evolution of lifestyle.''
Smart developers recognize this and cater to it. Developments by Nshama and Mag Property are very focused on creating units that are seeing strong interest from end users.
''You have to be more intelligent as a developer,'' says Gomes. ''You do have to have better layouts, the right finishes, good fittings and create better products. Regardless of whether the yield is 6 per cent or 6.5 per cent, buyers want somewhere to live when the demographic of the buyer is between 25-45 years old.''
But is it a market only for the affluent? And are buyers actually flocking to these developments solely for the amenities? ''Clearly, the number of developers that have catered to the end-user community has increased,'' says Lakhani. ''We witness this both in terms of the so-called affordable communities that have been offered, as well as the so-called trophy segment that is not investor based. So, at the mid-range of the spectrum, we have an increased preponderance of communities such as Nshama, Midtown and Mira being offered.
''At the higher-end of the spectrum, recently there have been offerings for Dubai Hills, Akoya and Sobha Meydan. These do not cater to the investor, but rather the end user.''
There has never been as much talk about affordable housing as there is now. There is a two-pronged policy approach to this. One is to make it a knowledge-based economy, which affects the median-income residents, and second is to create spaces focused on affordability.
''The government in Dubai realises that it's important to keep residents happy,'' says Godchaux.
''And you need to have more freehold developments at every price point to give the opportunity to every level of Dubai's population to own something. It is in the interest of the city to have people stay for more than two or three years. It's a self-realising prophecy. Creating internal demand is important.''
Who can afford it
Still, the reality is that even with lower prices, large chunks of Dubai residents cannot afford to buy their own homes. ''All of those emerging areas — Mohammad Bin Rashid City, creek area and Dubailand, all the way to Al Barari — are all mid- to high-range. Who's actually doing affordable housing? These are not affordable to a high percentage of residents,'' says Evans.
Lakhani points to available data. ''You have leasehold and freehold in Dubai. Density in leasehold is four times that of freehold,'' he says. ''[Residents] are not moving to freehold because freehold is much more expensive. Dh15,000 is the median budget, which does not get you anywhere in freehold Dubai. When you look at where the rents are in terms of the median income earner, it will tell you that less than 8 per cent of the population can afford to live in the freehold areas. This dynamic needs to change. End user is a suitcase term. But these are for affluent end users.''
Breaking down the numbers provides a better picture of the matter. Godchaux says high land costs keep much of the inventory out of reach for many. ''Affordable housing in Dubai is not the same thing as affordable housing in say, Europe,'' he says.
''In Europe if you earn a minimum salary and you're a two-income household, you can take a 25-year mortgage and you can still afford a house. If you live in big city you could afford a small house of 100 sq m for €150,000 (Dh606,813). Here with an income of Dh5,000-Dh7,000, even if two people pool their money together, it's not enough to buy a house. The market is still [for the] elite.''
Addressing the problem
Developers are addressing this issue through various means. Lakhani says that easy payment plans and smaller ticket sizes are all indicative of the desire to reach out to these buyers without actually bringing down the price.
Tariq Bsharat, Executive Director of Strategy and Operations at Mag Property Development, says, ''What we like to say is we have the largest 600-sq-ft apartment in the market. Meaning we are creating value through efficient design. We are looking to provide the largest living space for the smallest square foot. For an investor, if a 600-sq-ft and a 900-sq-ft one-bedroom unit are both going to demand a Dh60,000 rent, which one would the investor rather buy? Obviously the one that is less expensive.''
Gomes says that while affordability is a key driver, it's a tricky balance to achieve. ''To create affordable housing, you have to lower margins, you've to create higher volumes and it would benefit from larger pieces of land,'' he explains. ''You will have to design a superior product at an affordable price.''
Often this is possible in non-central areas. Bsharat says, ''We were able to provide an affordable product at Mag 5 Boulevard in Dubai South due to the low floor area ratio — the ratio of the building's floor area to the size of the land. We are able to reverse engineer the project to ensure that each plot has a maximum number of parking spots without having to build a basement or podium. This limited our construction cost and made the project very attractive.''
The mirage of affordable housing
What properties can an average household afford? Not a lot, according to a real estate expert. ''The average household income is between Dh10,000-Dh30,000,'' says Ashwinder Raj Singh, CEO of Residential Services at JLL India. ''At this income, given the cost of living, this can afford to pay annual rentals of Dh72,000 and maybe buy property costing around Dh800,000.''
Singh says that to get a mortgage, a buyer will have to shell out at least 25 per cent of property's value. ''If a property costs Dh800,000, the buyer needs to deposit Dh200,000, which is not an easy amount to raise immediately,'' he says. ''In the case of off-plan sales, the loan-to-value ratio is 50 per cent maximum, which means that a borrower has to pay 50 per cent using his or her own resources.''
He says that this amount is already way below the average price in areas such as Dubai Marina or Downtown Dubai, where a two bedroom apartment sells for around Dh4 million. Even though property prices and rentals have stabilised in the past year, they are still higher than two years ago and are poised to rise again by 2017. ''Developers are currently not investing in building projects catering to the middle-income segment.''
Until the third quarter last year, out of the 19,500 projects launched, he says a mere 22 per cent meet the affordable and middle-income housing criteria, despite the substantial demand in this segment. ''The primary reason is the low margins in this segment, compared with the very high margins in high-end properties. Some big developers in Dubai have as much as 50 per cent gross margins in their projects, thanks to government-provided land banks and other tax benefits.''
Source: Shalini Seth, Special to Property Weekly