Developers in Dubai are becoming extremely liberal with payment schemes these days, offering schemes that allow buyers to pay 10–30 per cent of the property value during the construction phase and the rest over several years after the handover. Generally, these payment plans are attractive and affordable, but some industry pundits say buyers should be vigilant and conduct due diligence before investing in low-entry point projects.
Niall McLoughlin, senior vice-president of Damac Properties, considers these over-generous payment schemes now widely seen in the market a major concern for the industry.
“Construction costs are normally 50-60 per cent of a project and if the developer collects from the investor only 10-30 per cent of the property value during the construction period, then how will he build the project?” says McLoughlin.
Buyers must understand, McLoughlin points out, that they pay the low initial amount only against the developer’s promise to build a home for them.
“The buyer should go to the Real Estate Regulatory Agency [Rera]to check the developer’s escrow account balance and ask the developer difficult questions, including how it plans to finance the remaining amount to build the project,” he says. “The big developers that hold large funds in the bank are capable to offer attractive payment plans, build and deliver those projects on time.”
However, when private developers offer longer payment plans after the handover, there is a risk they may not be able complete the project when funding sources such as bank financing dry up. “This is an unsustainable situation that worries us and can prove to be unhealthy for the entire market,” says McLoughlin.
When payment plans advertised appear too good to be true, then something may not be right says McLoughlin. Damac, for its part, offers payment plans that require 50-60 per cent to be paid before handover.
“We will [offer a] discount, but not change our payment plan to five years in future,” he says. “Our post-handover plans are available for completed projects, which are ready, but not on projects that are not even started yet.”
McLoughlin also believes the low-price entry can entice more speculators. “If suddenly the market changes and the buyer is not able to sell the unit, then such speculator tends to become a defaulter, which affects the other buyers’ investment, and hence it is not good for the real estate market as a whole.”
Transaction numbers
While more generous payment plans are clearly attractive for sellers, there is a definite concern that they could lead to a situation similar to that in 2006-07 where easy access to finance led to an unsustainable market bubble, says Craig Plumb, head of research at JLL Middle East and North Africa.
“Payment plans have certainly become far more flexible as developers seek to attract buyers in what is an increasingly competitive market,” says Plumb. “This has been a major reason why the number of off-plan sales has increased — there were 12,500 off-plan transactions recorded in the first six months of the year, compared with 17,200 in the whole of 2016.
“Developers are the dominant form of finance for purchases of off-plan property. While the number of mortgages issued has increased significantly in recent years, with 6,200 properties purchased with mortgage finance in the first half this year, the vast majority of these mortgages were for the purchase of existing property and only 450 mortgages were issued for off-plan sales.”
Plumb says purchasers should check the track record of the developer. “Analysis by JLL shows that only 40 per cent of the properties launched over the past five years have actually been delivered on schedule — something that we refer to as the materialisation rate,” he says. “Developers are recognising the importance of establishing a strong track record of completing projects on schedule and we would expect to see more developers focusing on their delivery record in the future.”
Reduced margins
The concept of post-handover payment plan is not unique to Dubai. Sameer Lakhani, managing director of Global Capital Partners, points out that this has been seen in other markets as well, from India to Singapore, Turkey and London.
“The post-handover payment plans are the real estate industry’s equivalent of quantitative easing that global central banks undertook in the period of 2009-15 as a way to stimulate the economy,” says Lakhani. “The post-handover payment plan is the response by developers to stimulate sales and step in when banks have been unwilling to provide financing to a subset of the populace. For the most part, this represents a price cut in present value terms, and in that sense, is a reduction of developer margins.”
Inflation is one of the factors that can severely affect a developer’s margins. “If we accept instantaneous payment for an asset or a commodity, then it’s worth more than if we wait two to three years for it. Inflation is the reason why holding assets is always best for the long term in terms of savings,” he says. “Now, if the developer is accepting a post-handover payment plan that runs into a number of years post handover, then time is what is eating away at profits; hence the reduction of margins.”
Post-handover payment plans provide liquidity to the investor or end user, thus, a developer’s liquidity levels need to be sufficient to extend this facility. “For publicly listed developers, such liquidity levels can be measured; the opacity and, therefore, the concern arises when private developers offer the same and their financial health cannot be ascertained,” Lakhani points out. “It is likely that some of these offers have gotten out of hand. However, it is equally likely that such concerns are being rigorously monitored by Rera. We opine that such offers have reached the outer limits of what is financially feasible, and it is probable that such offers will reduce both in frequency as well as generosity in 2018-19.”
He further adds that back-ended payment plans merely increase the likelihood of obtaining a mortgage for the end user, as banks have been uncomfortable in financing off-plan property. However, he adds that as banks get more comfortable with off-plan financing, these schemes will likely dissipate.
Type of plans
There are two kinds of payment plans in the market, says Yash Shah, director at One Broker Group. The first is the post-handover payment plan, which attracts both investors and end users.
“For investors, they get their handover before even completing payment,” says Shah. “This way they start getting returns on their property.”
Back-ended payment schemes offered by developers are attractive only when the developer has a strong footing and proven track record in the market.
“Such payment plans are attractive for end users who can now think of buying a property, especially the budget properties, which the developers are currently focusing on,” says Shah.
The prevalent payment scheme requires 10-20 per cent down payment and 80-90 per cent on handover. “It is also a great attraction for investors and end users, but buyers should ensure that the developer has paid in full for the land, appointed a main contractor and has 20 per cent in escrow before they start selling,” says Shah.
Fundamentals
Sanjay Chimnani, managing director of Raine & Horne Dubai, says buyers should focus on the fundamentals of buying real estate instead of just looking at the payment plan.
“Location, investment goals, comparative price, reputation and track record of the developer must always be paramount,” says Chimnani. “An attractive payment plan should only be the cherry on the cake and not the primary reason to invest in property. Besides, buyers can ask relatively new developers for proof of funds to develop and proof of construction finance to complete the project. Most developers would have this in place before they start a project. The regulations now are stringent enough to ensure most developments are completed.”
Chimnani believes post-handover payment plans will incentivise end users and smaller investors. “I think the payment plans are getting creative as the market gets more competitive,” he says. “This is much better than undercutting prices, which could become unhealthy for the market. Again, this is an attractive proposition for the buyers and the market as it holds price as new supply enters the marketplace.”
To stand out and compete in today’s market, Imrann Nawab, director of sales at Gulf Sotheby’s International Realty, believes developers have to think out of the box.
“The post-handover payment plans by developers is a sign of how competitive the market has become, but I do not see it as a concern for the industry,” says Nawab. “As the market is becoming more mature, it has become more difficult for investors or buyers to earn unrealistic returns.
“To satisfy the investors the developers, especially those who are new and want to gain the investors’ trust, are forced to create schemes like these to compete with the big, old names. This is one way they push their clients to try their product and gain trust.
“There are always two ways to look at it. The same scheme may prove to be attractive, but at the same time risky as many might wonder how they can deliver the building without full payments. However, with the rules and regulations in place, I believe the maximum risk that the investors might face is a delayed completion.”
Nawab adds that buyers are less likely to lose their money because the funds are deposited in escrow accounts. If a project is delayed by more than a year, the law allows investors to ask for a refund. “With the current market situation, I think few developers have a choice; [they have to offer] such payment plans to compete, which in one way benefits the buyers,” says Nawab. “Developers who have a strong financial background or are backed up with strong financial institutions do not need to rely on sales to continue with construction. Their funds allow them to gain an edge over their competitors.”
