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Aligning developer and investor expectations

Things to remember when investing in off-plan

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Buyers should request a disclosure pack containing full specifications of the project
Property Weekly

Many people decide to buy off-plan real estate when looking for a new home or for an investment as it may represent good value when compared with ready built property. Buying off plan may also allow the investor to buy at current prices and benefit from any upward movements in the market while also getting a stepped payment plan. After agreeing the price, off-plan buyers typically pay a deposit of around 5-10 per cent to the developer. Additional payments shall then be made through the construction process and sometimes payments after completion and handover may be agreed.

If prices in the market are rising then the chances are that the property will have already proven to be a good investment by the time construction has been completed and the property is handed over. A rising market cannot, however, be guaranteed. In addition, while purchasers and investors may get the benefit of cheaper pricing than ready built properties, developers may pass off some of the risk of delays in the construction programme to the purchaser or investor. Such delays are far from unusual and accordingly represent an important risk for anyone buying off plan. As the property is not built another risk is that the property does not conform to the purchaser’s expectations once delivered.

The risks referred to in the previous paragraph have been mitigated to some extent in Abu Dhabi and Dubai through real estate laws, which require developers to fully disclose the nature of their investments and provide feasibility studies as to their viability.

Notwithstanding such laws, it remains prudent for purchasers to do their research before any off-plan purchase. They should make enquiries to find out if the developer has a good name for completing off-plan projects on time and in accordance with the specifications and good industry practice. Developers with good reputation will usually not want to risk harming their reputations due to hand-over delays or quality issues. It is worthwhile to visit properties that the developer has already completed, whether in the different phases of the same project or in another development, to check on the standards of finishings.

In addition purchasers should request a disclosure pack containing full details of the specifications that will be included with their property purchase. It is recommended that developers ensure this pack is comprehensive, accurate and easy for buyers to understand as this will reduce the chance of disputes later. Moreover disclosure gives the developer the chance to demonstrate to purchasers the amenities of the building.

Purchasers may also want to ensure that their sale and purchase agreement affords them a right of inspection of the property prior to handover. Such clauses often allow the purchaser and the developer to jointly prepare a list of defects and repairs, known as a snagging list.

If the parties dispute the snagging list or any timeframe in which to rectify the defects, commonly the developer’s consultants will have the final say as to what is required.

Regardless of whether a right of inspection is included in the sale and purchase agreement, pursuant to the UAE Civil Code, the contractor will remain liable to fix defects for one year in the case of fixtures and fittings and 10 years in relation to structural defects and the laws of Dubai and Abu Dhabi require that the developer has the same obligations towards purchasers.

Finally, it is important that purchasers are aware that selling real estate off-plan is a regulated activity and should ensure that the developer is registered with the relevant authorities, has established an escrow account for the project and is entitled to sell off-plan.

 

The writer

David Bowman is senior associate at Al Tamimi & Company. The views expressed here are his own.

For information on the real estate sector within the UAE, please visit our sister site, getthat.com.

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