Dubai: For those developers in Dubai facing a cash crunch, there are investors and funds out there to take their projects past the finish line. But to get those funds, they will need to agree to a few conditions.
“First off, we will not be releasing any money directly to the developer,” said Samir Munshi, Managing Director at Silver Heights. “Instead, the payments will be made direct to the contractor, based on project milestones. There will be an in-house team monitoring construction — this is the only way investors will be reasonably assured the project will complete.”
In the past, Munshi says, investors who came on board stalled projects would pay directly to the developer, and there were instances when “they wouldn’t pay the contractors or using the funds provided to settle some of their other issues”.
Showing the money
Munshi is used to getting onto projects stuck for cash and then working towards completing them. He did so during 2011-13, which is why he is quite confident of repeating the same this time too. His firm has just put together $20 million for a project in JVT (Jumeirah Village Triangle) and Arjan (Dubailand).
But why would investors want to come in now? Isn’t there a chance that property values/cost of construction could become even more favourable if they waited slightly longer?
“All deals are happening on barter — no one is buying land on cash,” said Munshi. “It’s either done through joint venture agreements or deferred payment plans.
“Prices are already low enough — they are at par or cheaper than even in 2005, which was when the freehold market began. For instance, land at JVC (Jumeirah Village Circle) for a ground plus four-storey structure was sold at Dh115 or so a square foot in 2005. Now, it’s trading at Dh85-Dh90.
“If you also factor in inflation, these values are significantly cheaper.”
It’s not just in residential either. At JLT (Jumeirah Lake Towers), an office that was going for Dh650-Dh700 a square foot can now be bought for Dh400-Dh450, he said. At Business Bay, the current price for a commercial property would be Dh650 a square foot, while building a brand new one would be around Dh950, including the cost of land.
What investors like
This is what investors want to exploit to their advantage. “The values have become extremely attractive,” said Munshi. “If they provide the funds to finish a developer, they can expect yields of between 7-9 per cent in the mid-market segment.
“Because rentals, in spite of ongoing corrections, are still high. Dubai still needs about 30,000-40,000 new homes each year, to absorb population gains.
“These days, no one is going by the square foot price — it’s the overall ticket size that matters. What’s selling in the mid-market are studios for Dh400,000, plus or minus 10-15 per cent, and one-bedrooms at Dh650,000-Dh700,000, whatever be the size of the apartment.”
Unlike in 2011, investors who get into stalled/delayed projects will have to do so in alliance with the developer or the owner of the land. “Without the existing developer’s consent, you cannot take over a project,” said Munshi. “Because the underlying asset — the land — belongs to him.
“So, what Rera (Real Estate Regulatory Agency) is doing is first pushing “sick” projects into liquidation and auctioning the land.”
There are other rules that have made it tough for anyone to play hard and fast with investors’ funds.
“Rera is saying that whatever funds generated through selling off-plan need to be in escrow and will be released only for the “last mile of construction”,” said Munshi. “They are also strict on developers putting up 20 per cent of construction costs at the time of the project launch.
“But what’s happening is that most off-plan properties today are sold on post-handover plans. So if I, as a developer, sell Dh40 million worth of stock, I would have raised Dh16 million from buyers on a 40:60 payment basis.
“So, when I go to Rera to release funds for construction, it tells me to raise the remaining Dh24 million on my own before I get to use the Dh16 million collected from buyers. This is because they want to be absolutely sure how buyers’ funds are used. “But for a lot of private developers, this tightens their access to funds … and this is where investors can come in for a win-win situation.”