The choice could not have been more clear. For many investors in Dubai's new residential developments, the question was whether they wanted a house or a home in a community. But, for those who chose to live in a well-established community, their dream home appears to be farther than they could have thought. Not because they haven't got possession of their homes, but because what they have in hand is a house with no community around.
While this remains the situation, Dubai's leading master developer Nakheel has prioritised construction on eight community projects that are in advanced stages of completion, namely Jumeirah Park, Jumeirah Village, Al Furjan, Jumeirah Heights clusters, Veneto, Badrah, Jumeirah Island mansions and the Emirati clusters in International City. And going by the work recommencing on ground, of the $8 billion injected into Nakheel by the Dubai government, payments seem to have percolated to on-site contractors.
Nakheel needs revenue to repay debt
By taking up cudgels for its short-term projects, Nakheel may be intent on tapping revenue upon project completion. This, in turn, could be used to meet its operational expenses and debt obligations. "A finished product will translate into more revenue, either from investors completing their stage payments or Nakheel taking back properties from defaulters and either leasing or selling them," informs Charles Neil, CEO, Landmark Properties.
But, does all this actually make the home investor feel any better? While units in Nakheel's short-term projects have been listed in the secondary market, transactional activity has been muted, claim most real estate agents. "Activity has been slow across the market. People are not interested to buy in projects that may not be complete for some time. They would rather buy in communities that are well-established. This is more an end-user market and even investors are looking for properties that can give an immediate income. We have not seen investors buying bulk off-plan projects even at really low prices. It is just too risky for them," reckons Billy Rautenbach, managing director of The Property Store.
Demand only for completed projects
What appears to be critical is the creation of a wholesome community rather than a piecemeal approach. End-users and investors are only considering completed projects that offer a community vibe. Hence, Nakheel can look to generate buyer demand only if all phases in a project achieve significant construction progress. "When the units are completed, there will be interest from investors only if they are priced right, the quality is at a standard promised in the SPAs [sales and purchase agreements], buyers are allowed to conduct independent snagging, they are in the right location, community amenities are in place and access is good," says Landmark's Neil.
This being the case, Nakheel has now come under the scanner for failing to mobilise infrastructure in projects such as Jumeirah Golf Estates and Jumeirah Village. Buyers of golf villas in theupscale Lime Tree Valley, a precinct in Jumeirah Golf Estates,have been unable to move into their homes for want of utility services and other related infrastructure. "It is important for Nakheel to complete projects that are virtually finished such as Jumeirah Golf Estates. Infrastructure needs to be completed in terms of roads, access and power supply. It would be better for them to focus on two to three projects and finish them completely rather than thinking about projects that will take years to finish," remarks Rautenbach.
Credit notes: an exit option
At a time when oversupply has been identified as the local market's biggest concern, it makes little sense to add more stock to the pipeline and exert further pressure on rentals and sales prices. While contractual commitments with customers obligate Nakheel to continue construction, it has offered credit notes to investors seeking an exit from its long-term schemes. "Through the credit note programme, investors in certain projects can sell back their interests to Nakheel in exchange for a credit note, and sell these on to investors in other approved Nakheel projects. The credit note scheme serves the interests of the person wanting to sell out of a project, reduce Nakheel's liability by not having to complete that particular unit, and reduce the amount of the stage payment to be made by an existing investor. The discount rate on these notes increased during 2010 from 25 per cent to 60 per cent," informs Neil.
However, the recent announcement of remobilisation on Jumeirah Park and Al Furjan only amounts to a small percentage of supply due in these areas. For instance, Nakheel has announced that work will restart on only 289 three-bedroom villas out of the 2,764 planned in Jumeirah Park. In Al Furjan, they are currently proceeding with 363 units out of the 800 in Phase 1 which had been planned. There is, however, a flip side to this. "By delivering only a fraction of the planned units, there may be problems in future in attracting demand to these units as investors and end-users are reluctant to consider properties located in unfinished communities," warns the Landmark executive.
While delayed project timeframes put Nakheel's reputation at stake, they are also a financial encumbrance for several individual and institutional buyers, whose capital is tied up in these developments. "Although most owners were given the option to consolidate their funds into other active projects, some of them have decided not to relocate their investments as they are sold on the lifestyle that these projects offer," adds Mohanad Alwadiya, managing director, Harbor Real Estate. The swapping option has been offered in projects that have little chance of completion in the near future, such as Palm Jebel Ali and Dubai Waterfont, to those expected to be completed over the next 12-24 months. While the restarting of work on Nakheel's projects stokes oversupply fears, new supply could make sense if they are incentive-driven, feel some experts. "Nakheel could come up with attractive packages or options that appeal to a specific market segment and achieve success despite sluggish market conditions," suggests JP Grobbelaar, director of development solutions consultancy services, Colliers International.
Also, some of the pricing could be particularly attractive, given the current market conditions. Alwadiya says, "Most of Nakheel's short-term projects offer excellent value for money. To give you an example, a four-bedroom villa in the Meadows is selling in the range of Dh3.3 to 3.7 million; if you compare this to a new four-bedroom villa in the neighbouring Jumeirah Park, a buyer can get the same or even bigger villa for Dh2.7-2.8 million."
Service fee row
In a new twist to the service charge row, Nakheel is reported to have sought settlement of master community charges as a prerequisite to unit handover in Jumeirah Village.
"Where the contract was direct with the developer, there may be a provision requiring the owner to pay community charges prior to handover. However, if a current owner purchased from someone other than the developer, unless a special document was signed, the owner may not be liable to pay such community charges," explains Gary Bugden, executive chairman, PRDNationwide.