Dubai's private developers may need to put up 50% in bank guarantees to launch offplan projects

Dubai: Launching a freehold project in Dubai is becoming tougher for private developers as they are now required to put up 50 per cent of the project value in the form of equity bank guarantees. The earlier requirement used to be 20 per cent, developer sources say.

The move, not yet officially confirmed, will curb the number of offplan residential projects launched in the market quite drastically in the months ahead. In turn, this will reduce the chances of further new supply of apartments flooding the market and dropping property values.

Three private developers have confirmed to ‘Gulf News’ that they were asked to provide the 50 per cent guarantees – “We don’t know as yet whether this is being done on a case by case basis, or a blanket requirement expected from all private developers going forward,” said an industry source.

“It’s not easy to come up with such funds in a market situation that we have today. Private developers will then always be at a disadvantage to the big developers.”

Why have this guarantee?

Private developers were required to issue these guarantees to the authorities as proof of their commitment to launch and to show they have the funds to take the project to completion. Also, this way, the interests of property buyers in those projects are also taken care of to an extent.

The funds are placed in escrow and released as the project clears set construction-linked milestones. The authorities by using this method wanted to cut down on the chances of insufficiently funded developers entering and then doing the skip if market conditions tighten and they run out of funds to complete.

“The 20 per cent guarantee was doing what it was intended to – provide assurance that only developers with the right credentials could launch,” said a developer. “But raising that to 50 per cent immediately reduces the chances of private developers to launch new projects.

“Already, they are playing catch up with the biggest developers in Dubai. This increased guarantee requirements will only help the big ones.”

In-built protection

There are other safety measures the authorities have in place with developer funds in escrow. Once a project is completed, 10 per cent is still kept in escrow for a further 12 months to take care of any inadequacies that show up post-handover.

Fear of oversupply

It could be that the authorities want a clear drop in the number of new offplan projects being launched between now and the next two to three years. That would give sufficient time for the market to recover and a good portion of the current freehold build up to be absorbed via sales.

Before the pandemic struck, it was expected that 2020 could see delivery of well over 30,000 units and even cross the 50,000 mark. The same was expected from next year as well.

But after COVID-19 intervened, new home deliveries are likely to close at under the 20,000 mark this year.

Not an offplan year

Launch of new offplan projects have ground to a virtual halt. There is talk of some new launches happening at or around the Cityscape event this month.

But unless the developer can show off a project that is well beyond the norm in terms of specs, investors may not be in the mood to go for offplan.