Dubai: Transactions in local property credit notes are on the cusp of a major breakthrough, which could potentially leave the issuing developers and their existing investors in a win-win situation.
Since the first quarter of 2009, some of Dubai's leading developers have issued credit notes to property investors in lieu of their projects that have either stalled or been shelved. Investors could then use this to switch to another property built by the developer, which is complete or nearing completion.
"The credit note assisted developers in cancelling unrealistic projects, investors were pleased as their equity was safeguarded and the note could be used to pay down balances on other properties from the same developer," says Tom Bunker, investment sales consultant at Better Homes.
"To the best of our knowledge, credit notes are legitimate as they represent a solution to investors who have paid towards projects that are under development but may not be completed. It's a way for the developer to cancel a project and safeguard the investor's equity by allowing him to redeem the note against another property that will be completed by the same developer."
Through the second half of 2009, a strong secondary market built up in credit notes where an investor in a delayed project would "acquire" the property belonging to another investor, but one who has been having problems on meeting his payment installments to the developer.
"Where the credit note was sellable, many investors bought them at a discount and then used them to pay down their balances on other projects thereby reducing their acquisition costs for those," adds Bunker.
It closely follows the announcement on Nakheel's payback to its creditors over a five-year period and the local property market's — more or less — favourable response to it.
Other factors could come into play as well. "There is a buzz of anticipation as a leading master-developer who issued credit notes would shortly go in for a 24-hour settlement process in third-party transactions compared with the six-week period it takes now," says Ranjeet Chauhan, partner at SPF Realty.
"If this happens, it will free up a lot of investors' money presently held in projects that are going nowhere. Developers too benefit by having to deal with less of such properties on their books and the transaction charges they get on third-party credit note deals."
Credit notes
Most people who have a stake in Dubai's property market know about credit notes. Through the last three quarters of 2009, Dubai's real estate sector saw a significant upturn in credit note transactions.
"They can try to sell them in the open market if the credit note permits them to do this," says Tom Bunker of Better Homes. "Otherwise they should redeem them with developer for units almost ready or are well underway for completion. They may also use them to pay down other properties they may have with the developer."
