Dubai property developers have been increasing incentives in the form of payment plans, post-handover options, guaranteed returns, registration fee waivers and much more to attract buyers. But such innovative methods to seal the deal are not restricted to developers; brokerage firms are also trying out new ways to get transactions rolling. “Sell-on clause” is one such new method that aims to ease the concerns of property owners about selling when market prices are low and missing out when rates start to rise.
Under this arrangement, both parties agree to share the net profit if the property is resold within three years. It would seem improbable for a buyer to agree to such terms, but Firas Al Msaddi, CEO of fäm Properties, which has been championing the scheme in Dubai, says there are enough incentives to convince both parties to agree to a sell-on clause.
“Missing out on rising market prices is what sellers fear most in real estate as in other areas of business,” says Al Msaddi. “The risk is higher for building owners who know that unit prices may climb over the next two to three years. The new transactional structure [of a sell-on clause] gives them cash to reinvest as well as a share of future profits. At the same, buyers acquire property at attractive rates knowing prospects for growth far outweigh any downside risks.”
How it works
The company has already brokered one such agreement for the sale of a Dh100-million residential building in City Walk. “Using the same concept on behalf of other investors, we’re now in the process of customising two similar large transactions with one of Dubai’s biggest developers,” says Al Msaddi.
In a transaction with a sell-on clause, an owner of a property worth, say, Dh10 million, may accept an offer of Dh8 million to free up cash. However, the agreement may also stipulate that the buyer guarantees a 50 per cent share of the profits on any resale within the next three years.
Explaining the sale structure further, Al Msaddi says, “The buyer, who becomes the future seller, agrees to share 50 per cent of the net profit of the re-sale. The original owner will continue to receive 50 per cent of the net profit of the sales of each unit, for example, with a building that has multiple units. The profit sharing with the original owner will stop once 125 per cent of the net profit of the unit sales is covered. In the above example, the difference is Dh2 million, so 125 per cent of Dh2 million is Dh2.5 million.”
Risks
While a sell-on clause can be a win-win solution for some, Nick Grassick, managing director of PH Real Estate, says there are concerns that are holding back some buyers from embracing such a structure. “The buyer may intentionally decide to resell in three and a half years, thereby circumventing the agreement,” Grassick notes. “What influence will the seller, who by then is no longer associated with the property, have regarding encouraging a sale in the future. Moreover, how robust is the agreement between the two parties and how vigorously can it be enforced, as what is entered into in good faith may deteriorate into a legal matter.”
Nonetheless, Grassick says such schemes can be the right fit for certain segments.
“I don’t know how sustainable this solution is for the wider market,” says Grassick. “I believe it is a niche solution that can be mutually beneficial provided both buyer and seller are informed of all potential outcomes.”
Not mainstream
Sameer Lakhani, managing director of Global Capital Partners, views these bespoke agreements mostly as institutional. “The innovative clauses where a percentage of future profits is offered emerge from a bouquet of options that developers and brokers enter into,” says Lakhani. “And such initiatives are not new in the market, but have been around from the early days of freehold. Brokers and developers in the past have entered into sale and buy-back agreements, share structure schemes and even fractional ownership structures, where large ticket sizes have been sliced into lower amounts, enabling wider investor participation and offtake.
“Such innovation is part and parcel of the market and will continue to have a place in the system. It is important to remember, however, that such schemes, given their bespoke nature, will occupy a niche of the market and are not mainstream.”
While such initiatives can boost sales, Chris Whitehead, managing partner of Gulf Sotheby’s International Realty, points out that they are not long-term solutions. “I believe initiatives aimed at developers, such as regulating supply or initiatives focused on incentives when purchasing such as increased loan-to-value ratios, citizenship and transfer cost reductions would prove more beneficial in the long run and bring more confidence to the economy,” says Whitehead.
Government regulation and intervention can also create an even bigger impact on market confidence. Lewis Allsopp, CEO of Allsopp & Allsopp, says a system adopted by the Dubai Land Department [DLD] that provides a unique property reference number for every property listing and shows pertinent documents relating to the property is one such move in the right direction. “These documents include a signed form A from the property owner,” says Allsopp. “This will eventually be connected automatically to all property portals, so that only genuine property listings are being advertised, which will give clients a clear picture of the market.”
Real support
Mario Volpi, sales and leasing manager at Engel & Völkers, also points out the need to create more awareness and to educate stakeholders in the market. “There is a need to educate the sellers and landlords about the real market to get property prices down to realistic levels. There are still far too many opportunist sellers and landlords who convince weak agents to market their properties at unrealistic prices,” says Volpi.
Allsopp also highlights the move by the DLD, in partnership with Property Monitor, to make available transactional data. “It’s the increased levels of transparency that in turn gives an increased level of purchaser confidence, and this is going to be the real support for the market,” says Allsopp.
