Fair trade?

Should Dubai off-plan property buyers accept the offer of a transfer to another completed or nearly-completed development? This is a dilemma facing many who bought off-plan during the Dubai real estate boom that collapsed with the credit crunch last autumn.

Dubai Holding, for example, has been offering buyers of Sama Dubai's The Lagoons project the opportunity to take up a unit in Jumeirah Beach Residence. There is also talk of Nakheel and Emaar promoting similar swap deals, although the details are sketchy.

The racing fraternity will be familiar with the parable of the gift horse and the need to inspect such a beast very carefully before accepting it. Why is this offer being made, particularly if it seems of little benefit to the giver?

Well, at least that poses a sensible question. And the answer, in the case of Dubai off-plan property, is that swapping off-plan promises for unsold units makes excellent sense for the developers. They gain a purchaser for an unsold unit and lose a commitment that they may find difficult, if not impossible to fulfil.

Unit swapping

For the swapper the benefit is considerable: a unit to rent, sell or occupy as opposed to an endless wait for a unit that may or may not be ultimately delivered. No prizes for guessing that this scheme has been very successful, even if there may be grumbles about the fairness of the swaps.

In one recent statement, Dubai Holding claimed it was 70 per cent through this process - if that's true then the existing owners of Dubai properties also have cause for cheer. For every off-plan swap is another unit off the supply chain that threatens to undermine local real estate prices for years to come.

There are unconfirmed reports that Emaar may have cancelled 13 towers in the Downtown Burj Dubai district and is offering alternatives to off-plan buyers of these properties. Perhaps it's just a coincidence, but the latest Dubai Q3 report from Asteco notes an 8 per cent quarterly price increase in the district.

Actually, as Asteco says this is almost certainly down to the "Dubai Mall, the Dubai Fountain and improved infrastructure in the area" that is overshadowed by the world's tallest building, the Burj Dubai set for delivery on December 2.

Yet it's interesting to see that the second biggest price rises of 5 per cent are at Jumeirah Beach Residence where there have been swaps from The Lagoons project, which is now apparently on hold with no forward timeframe. Anybody who swapped into JBR from The Lagoons must be delighted. But then again JBR has a unique selling point in its fabulous beachfront location and The Walk, a long promenade of shops and restaurants as well as access to luxury beach hotels.

Signs of stability

Overall, the Dubai property market shows signs of stabilising after the traumatic price collapse since last September with house prices down by 50 per cent from peak levels. According to Asteco, apartments and villas showed respective quarter-on-quarter price rises of 1 and 3 per cent in the third quarter.

Supply and demand remains a major issue for Dubai real estate. The net loss of 81,000 subscribers reported by UAE telecom operator Etisalat in the second quarter is the best evidence to date to support claims of population decline since the economic crisis hit the nation. Most of these lost subscriptions were probably in Dubai rather than Abu Dhabi, where economic growth has been less affected by the global financial crisis. That could mean that Dubai's population is down 4 to 5 per cent this year, not so far off the 8 per cent estimate from UBS for 2009.

The impact of falling demand is clear with 25 per cent of units vacant, according to Colliers International, and landlords have been forced to reduce prices by up to 50 per cent to keep units rented. But Asteco reported some stability in the rental market in the third quarter with apartment rents down another 3 per cent while rates for villas remained unchanged.

The units keep coming

Upcoming supply is what keeps landlords awake at night. Studies point to a supply chain of 35,000-60,000 new units in the residential market over the next two years, adding at least 10 per cent to the existing number of residential units, and an even greater inundation of space in the retail, office and hotel markets.

The latest report from Colliers says that the occupancy rate for new office developments has fallen to 41 per cent, and laments: "The already oversupplied office market is expected to increase by 100 per cent between 2009 and 2011."

Colliers forecasts that office space in Dubai will increase from 3 to 6 million square metres by 2011, and reported an annualised 58 per cent fall in office rents. Retail rents are down 18 per cent. Those considering whether to take a developer's offer of an apartment swap or whether to wait for a promised project to be started ought to contemplate these figures very closely.

So how likely is it that projects will be started in an environment of oversupply?

You need only look at all the stalled construction sites across Dubai to realise that there are dozens of projects that will have to be finished before any new foundations can be laid. And what will happen to your money if you decide to wait?

Only if a project is declared officially cancelled will you get your money back. If the development has started then your deposit has paid for that work and until the project is finally delivered, there will be nothing for you.

On the whole, it is a no-brainer. The Dubai property market has crashed and off-plan buyers who get another completed unit offered to them would be mad not to jump at the opportunity.