No choice but to offer options to investors

The Dubai off-plan market has taken a serious beating in the last eight weeks and developers are starting to react.

Let's take three instances. First, Emaar's 'Plan to Own' ('PTO') and 'Rent to Own' ('RTO') programmes Actually, the RTO is fairly old wine in a new bottle. It was launched in 2002 to kickstart flagging sales of the Greens apartments. GGICO and Gowealthy.com launched Axis Residences Phase 3, a project with 1, 2 and 3 bed apartments with a three per cent down payment. The payment during the construction period is a fixed Dh9,500 per month and the balance is recovered over 8 years.

In the first two cases, it is mainly an attempt to boost sales of off-plan units. The third is interesting as it appears to be the first publicly announced effort by any developer to reschedule payments of existing buyers.

What's driving these schemes and what's their impact on the property market, if any?

We need to see the context. Developers financed their projects through IPOs (e.g. Emaar), Debt (eg Nakheel) or collections from off plan sales (everyone). Off-plan sales were the major source of funding and in an era dominated by speculators, this was easy. Projects funded each other and as long as the market continued its upward journey, it was good going.

Some developers also got ambitious and kicked off mega projects where billions of dollars have to be invested before a singe sale can be made. So off plan sales were - and continue to be - very important for most developers.

Now the off-plan market has gone south. Don't get me wrong: At the huge risk of being called a mindless optimist, I maintain that I'm bullish on Dubai property for three very good reasons. First, I don't think this is the much-heralded price correction due to oversupply and two obvious indicators of strong, genuine demand are that ready built properties have suffered much less price depreciation and also rentals keep heading up. So the property fundamentals are still strong.

Second, the property market (and its key players and key linkages) is too big and important to just fade away.

Third, if there's any liquidity left on planet Earth, this is that place, witness Gordon Brown coming to visit with cap in hand! This correction was started by speculators who were overexposed and quickly followed by the usual crowd of lemming-like sellers. Too few people bother to analyse and understand these basic facts.

So what gives?

First, through these schemes, developers are trying to persuade buyers not to cancel their contracts as this could have a double whammy - loss of future collections plus the prospect of holding unsold stock for some time.

Second, not all developers can afford to extend such schemes for too long as it will hit their cash inflows and hence possibly even delay projects.

Third, developers have effectively had to become bankers and they're actually giving interest free loans to buyers with implications for their credit risk.

Fourth, we will see more such schemes and innovation may take centre stage as developers try to differentiate.

Lastly, and most importantly, developers seem to be betting that speculators have reduced in significance, end users are in the game and hence will be attracted by deferred payment schemes. This could be true and it may work - a combination of lower prices, attractive properties and extended, interest free payments may just be what the anxious home owner was waiting for and this, in combination with some much needed injection of affordable mortgage finance, may just revive the off plan market.

- The writer is a Chartered Accountant and CFA Charter holder and is a UAE based freelance writer on real estate. This article does not constitute investment advice and readers are advised to conduct their own due diligence.