property

On target with off-plan property

As off-plan property sales rise, buyers need to look beyond the hype

By Shalini Seth
00:00 July 26, 2017

With increased off-plan property sales in Dubai in the first five months of the year compared with the same period last year, homebuyers and investors are putting their faith in developers to deliver timely, high-quality stock. The number of off-plan transactions in Dubai increased 45 per cent in the first quarter, according to a report by Chestertons, while transactions for ready properties were up 4 per cent during the same period, with overall transaction activity showing a 25 per cent increase.

“Off-plan has a bit different demographic of buyers,” says Ivana Gazivoda Vucinic, head of advisory and research at Chestertons, tells PW. “It is probably the only opportunity for a certain number of people living in Dubai to own their property. So here we have an increased number of end users.

“You have low entry price and good payment plans — this is where most developers are targeting people living in Dubai who cannot afford Dh1.5 million to Dh3 million for a property.”

While agreeing with the surge in end-user activity, a report by Global Capital Partners and Reidin reveals a shift in off-plan transactions from lower-value to higher-value ticket in the first quarter compared with the same period last year. Properties above Dh1 million accounted for 47 per cent of the overall transactions in the first quarter last year, increasing to 64 per cent one year later.

“It is clear that the marketplace is now shifting towards a preference for larger ticket sizes, indicating not only a swing of the pendulum away from ‘cheaper’ units, but also a greater preponderance of end-user activity,” the report states.

Imaginative payment plans offered by developers have helped popularise off-plan. When banks have stayed cautious in offering loans for such properties and stringent mortgage regulations mandating a maximum 50 per cent loan-to-value ratio, developers have created payment plans to match different buyer profiles.

Mohammed Miqdadi, managing director of Durar Properties, tells PW that buyers use payment plans to help them make investment decisions. “We have made our payment plan as easy as possible,” says Miqdadi, noting that one type of investors look at paying a certain amount over a period and then securing bank facilities, while another comprises professionals who invest the bulk of their savings into real estate. “They may make Dh200,000 in savings from bonuses and salary. Rather than keep it in a bank, they would invest in a real estate.”

Profile

Creating a more detailed profile of off-plan investors may be difficult because of a lack of data, but realtors generally know where to look for clients. “I think most people buying off-plan are professional investors — they may not be speculators,” says Christopher Taylor, CEO of Abu Dhabi Finance. “Investors may be open to exiting early if they see appreciation, but they are also committing to holding it for the long term, which is very different from speculation.”

A few years ago the norm was to pay 50 per cent in stages during construction and the rest at handover. Vucinic says developers are now competing on the basis of attractive handover terms. “On average most offer a two-year post-handover payment plan,” he says. “But I have seen one developer offer up to five years post handover.”

One big reason for the flurry of off-plan activity is that more developers with credible track record are offering it. But experts still advise due diligence when investing in off-plan property.

Developer credentials

“The biggest nightmare for people buying off-plan is delay,” saying Daniel Xu, senior legal consultant at DLA Piper. “That happens when the developers run into trouble with contractors or when they run out of funding. This is where reputation comes into play. If it sounds too good to be true, it usually is. Go with a reputable developer. Check that there is a proper track record.”

Many real estate developers in Dubai are government-related entities, says Aly Rana, a real estate finance and advisory executive at Mashreq Bank, “so there is a strong comfort level that has been built over the years with developers such as Emaar, Nakheel and Dubai Properties, among others”.

She adds: “They have a reputation at stake. They have a plethora of buildings in the market and they cannot afford for these to fail.”

The best sources when background checking are usually investors, but the government has also been more proactive in protecting buyer interest.

“You have to do basic checks on the developer, which the Real Estate Regulatory Agency [Rera] provides,” says Xu. “You don’t want a developer that has no track record and who comes in wanting to make a quick buck. I would say that many local developers are safe because their interest is to be here for the long term.”

Bank checks

While getting mortgage on off-plan is difficult, this may still be a good approach for a retail buyer. “All banks have an approved list of developers who they are most comfortable with,” says Rana, adding that buyers should also check if a development is backed by a bank. “You cannot mortgage an off-plan property until 50 per cent has been completed. However, if the developer is good, there is faith in its ability to complete the project. So reputable companies entering different markets are able to get strong mortgage partners. The mortgaging bank also knows that there is a bank which is doing development finance. One actually buffers the other.”

While off-plan sales are generally intended for funding the development, these are not the sole source of funds. “We offer off-plan, but we don’t make our plans based on off-plan,” says Miqdadi. “If you keep your plans in a way that depend on off-plan and they don’t happen, then you are putting yourself and your investment at risk.”

Know your risk

Even with all the checks and balances, risk is a by-product of buying off-plan on extended payment plans.

“It’s low risk, but it is there,” says Taylor. “Let’s say you have moved in and you have paid 50 per cent and you are paying the rest over seven years. If the developer goes bankrupt, do you own the property or not? When you have a mortgage, banks are regulated and have the title deed. Here, the buyers only have an agreement and not a mortgage. Similarly, what happens when the customer can’t pay? We don’t how these situations will work out because they have not happened yet. It is untested.”

Xu recommends having an airtight agreement and a healthy knowledge of the law. “Even if you don’t have the title deed, you will have the contract and the sales and purchase agreement. Until the title actually gets transferred to you, it is your recourse against the developer. Rera regulations, which are tightly controlled, are your safety net.”

Mortgage cap

Market watchers say mortgage caps will come under review at some point, making these properties more accessible and safer for retail investors, while keeping speculators from using mortgage to buy multiple under-construction properties.

“A first-time buyer should have the ability to get some finance,” says Taylor, who recommends a 30 per cent equity on handover and 70 per cent mortgage. “You can probably then get an equity release to get that money back.”

He proposes a system where payments are made alternately between the buyer and the bank. For instance, the buyer pays 20 per cent and then the bank pays 10 per cent according to the payment plan, followed by the buyer and the bank both shouldering the next payment with a 10 per cent contribution each.

“Once the customer has [paid] 30 per cent, that’s good equity and the bank then takes over the rest of the payments,” says Taylor.