Dubai: The current deferred payment plans and other incentives from developers in Dubai could be just what property buyers want. But too much of giveaways should always come with a warning.

These “gimmicks” are “often associated with low value proposition, thereby decreasing the quality of the supply pipeline and augmenting market risk,” says the new Dubai realty update from Phidar Advisory. “These tactics are often used by new/unproven developers or developers with a questionable track record. “Even the best developers are now offering 40-60 per cent due after handover, often with additional incentives, like waiver of the 4 per cent transfer fee. This equates to a shadow financing market for real estate.”

Since mid-2016, many private developers have been toying with how to structure the payment plans. Initially, there was a sort of consensus around the 2-year mark, whereby buyers could complete their instalments two years after handover. But now, that’s being stretched to a good five years and more. For those developers without adequate cash flow, it would mean they might have to cut corners ... and build quality could end up being an after-thought.

According to the Phidar report, the other potential crisis could emerge in demand within the secondary market. The off-plan sales surge has muted demand for ready properties, especially in the secondary communities.

“Post-handover payment plans will continue to pull demand out of the secondary market and into the primary,” it states. “The primary market offers relative value and will absorb capital from investors and owner-occupiers. This signals developers to launch more supply than required.”

The relatively weaker demand for ready properties could also be due to the pricing. “The residential market for completed assets still is overvalued by an estimated 15-20 per cent,” the report says. “The market may or may not correct to this value, depending on power of sentiment and exogenous factors.”

By end of the second quarter of 2017, secondary market volumes were down by 24 per cent plus year-on-year against second quarter of 2015 numbers. And by a whopping 61 per cent from the peak in the fourth quarter of 13, based on the transactions in the city’s apartment clusters.

“Buyers remain on the side lines with cash ready to deploy at the right price ... [but] sellers are not adjusting to those prices,” the report adds. “So, the secondary market has virtually halted. The post-handover payment plans artificially boost demand and will likely lead to overbuilding, compounding the problem in the years to come.

“Whereas investors and owner occupiers may prefer to purchase in established communities, the limited access to finance and/or the 25 per cent down payment required creates barriers and pushes those buyers into the primary market.”

According to Jesse Downs, managing director at Phidar, “Sale volumes of completed properties are at a six-year low and vacancies are rising across the city.”

Vacancies have “increased significantly in established residential areas popular with mid-high and high-income households — in some cases vacancies are up to 35 per cent. However, prices have not yet adjusted, either due to uncertainty or unwillingness of landlords.”

The way out for a lopsided marketplace

* According to Phidar’s report, as against the average four-year market cycles elsewhere, Dubai’s tend to be shorter ones. “This can compound cycles and bolster volatility. When supply cannot meet demand on an upturn, it creates inflation. Yet the bulk of projects launched in the upturn are completed in the downturn, thereby compounding rent and sale price declines.”

* Increased competition from “higher value” housing options has “pushed landlords to offer inducements to retain/attract tenants. Tenants can negotiate maintenance and renovations of older assets, which even includes projects built within the last 10-15 years in investment zones.”

* For mid-income housing development to get going, the city will need to see “land subsidies and significant changes to municipal development regulation. Economies of scale are the only way to create successful mid-income communities.”

-M. N.