Dubai: There is a rush of investors, mostly from India and Pakistan, buying stalled residential projects in Dubai.
They are pumping in fresh funds to complete the projects before year-end.
The main target: Low- to mid-rise under-construction buildings that had hit the 40-50 per cent completion mark. They're unfinished projects as the original developer ran out of funds.
“That would be the ideal status for an investor coming in – they don’t have to spend months trying to get clearance for designs, contractors, etc.,” said Mohammed Mustafa, Managing Director at Emsquare Engineering Consultants.
“The structure is mostly done, and at that stage, a mid-rise building will only take another 5-8 months for completion.”
The top locations for these investors are projects in JVC (Jumeirah Village Circle), Arjan, and clusters within Dubailand.
Spike in demand
What explains the sudden spike demand for delayed projects?
In one word: Expo.
These investors are reasonably certain that once Expo 2020 Dubai opens in October, it will set off a captive demand for mid-market residential options.
“So, anywhere from just before October 2020 to after April 2021, there will be an influx of visitors and a need for short/long-term stays,” said Mustafa.
Investors do not want to spend any time on more paperwork for themselves
"It will be the peak time for renting out… or selling the entire building," he said.
"Even after the Expo, these investors are confident they can generate optimum yields – typically about 8 per cent or so."
Cost of entry
A lot depends on the price investors are willing to pay to acquire the delayed projects.
On average, recent deals have been in the Dh40 million to Dh60 million range.
Investors are also particular that the projects they pick should not be on RERA’s (Real Estate Regulatory Agency) "Tanmia" list of shelved/delayed projects.
"Investors do not want to spend any time on more paperwork for themselves," said Mustafa.
"The deal is struck with the developer directly, whom they pay off minus all liabilities. They bring in specialist contractors/project consultants and immediately start work on site."
Emsquare, for example, is now working on multiple "turnaround" projects, both as a consultant and as investor-partner. It is also handling a G+30 development in Business Bay, where the developer ran out of funds.
This project is headed for a late 2021/early 2022 completion.
Need for speed
Time is of the essence — everything hinges on getting the projects ready in time for Expo 2020 Dubai’s expected peak months by the end of the year.
Investors will also prefer to deal in those projects that have not seen any offplan sales.
That way, they can set a fast pace towards project completion and then aim for a bulk leasing. These days, there are real estate funds in the UAE that do have a keen eye on completed projects and where the units are rented out, preferably on long leases.
"Investors coming from abroad are bringing their own equity — they have no need for bank financing," said Uzair Razi, Chief Investment Officer at GCP, which acquired a stalled project in JVC in 2018 and is now looking at completion by the second quarter this year.
"But this is also attracting some UAE national investors who earlier would not have looked at projects in the freehold space. They, too, find ample value in turning around "sick" projects – but they do it mostly through bank financing unlike foreign investors.
"Capital gains are expected to be high, but on a rental cash yield basis. Investors are looking at high single digit net returns."
• Make sure to have a thorough reading of all the project liabilities, including whether any units were sold as offplan. If units were sold, it’s vital to keep the owners involved of any change in project status. This will save headaches later on.
• Once the project is acquired, make sure the built structure does not have to be put through too many design changes. Any such work will only delay the completion date.
• Depending on how long a project was stalled, any resumption of work will require inspection checks by the authorities.
• Ask for a discount — Chances are that investors will get a discount to the prevailing rates in the market. "Semi-built structures will attract the highest discount because it potentially involves not only changing the contractor/sub-contractor, but in some cases the consultant as well," said Uzair Razi of GCP. "And therefore, having to reconfigure floor plans. But typically, a discount is a function of the structure of the deal and what the liabilities are."