Dubai: ‘Buy a home and stop renting…’ That’s been a compelling message developers have been repeating all through the ups and downs of the UAE’s real estate market since 2012.
How feasible is it buying an off-plan house?
They stepped up their campaign a notch through aggressive post-handover payment plans all through 2017 and 2018, whereby a buyer could buy an off-plan property with a 5 to 10 per cent down payment, and pay most of the rest in installments stretched over years after the handover of their home.
In most cases, the post-handover schemes averaged three years after delivery, during which time the owner needed to pay off. But there were several offers where the payment period could extend to five years and well over.
But is this the best option for someone wanting to move out of paying rents right now?
Most of the off-plan schemes from 2017-18 would have seen their handovers between 2020 and 2022. That means, the buyer would have to keep on paying rents as well as meet the payment obligations to the developer till his home gets built.
That, in a tough market, is one payment too many, according to market sources.
How about buying a ready home?
Sure, residents wanting to get out of paying rents can buy a ready home - and there are quite a few options available as Dubai sees more freehold projects get complete and those homes being ready for purchase (or rental).
But here’s the catch - for a genuine end-user, raising the cash to purchase is proving tricky. Unless he can call in his own funds.
Limited finance options still represent the biggest hurdle to people looking to jump on the property ladder
John Stevens, Managing Director at Asteco, knows where the problems lie: “While there has been a rise (not spike) in demand for completed properties due to increased affordability, limited finance options still represent the biggest hurdle to people looking to jump on the property ladder.
“That’s why low down payments and flexible post-completion payment plans certainly make off-plan properties more attractive to end-users with limited up-front capital.
“On the downside, the buyer will need to wait for some time before he can live in the completed property. In addition, there are still a number of uncertainties surrounding the off-plan market, which can deter potential investors.”
A soft market
The biggest deterrent is the continuing decline in property values. Consider the case of a property owner who turned seller recently.
Y.Z. bought the property - located in one of the most desirable emerging communities in Dubai - back in 2015, when the market was just starting to cool off. The price - Dh2.8 million for a three-bedroom villa.
He took possession last year, stayed at the place for over four months, and then decided to sell it because he feared the market could take a further plunge.
“There were new homes being delivered all over the community and more coming through - I felt the pressure on property values would escalate,” he added.
There were new homes being delivered all over the community and more coming through - I felt the pressure on property values would escalate
And Y.Z. was right - he placed the property on the market for Dh2.7 million. He did receive quite a few offers… but for sub-Dh2 million. He eventually sold it for Dh2.1 million.
“I still feel I am among the lucky ones - I could have lost more than a million if I held on,” he added. “And this was not a ‘paper loss’ - I had paid off the entire cost of the property when I moved in.”
The question then is, how many prospective buyers are out there who would want to put up money when the market is still in decline. Because unlike investors, these sort of buyers are in for the long term. Buying a home just because they want to quit staying in a rental home alone won’t cut it.
Kalpesh Kinariwala, Chairman of Pantheon Development, suggests some sort of give-and-take on the part of developers and buyers.
“Developers must start offering payment plans only after they complete building 50 per cent of their projects,” he said. “It means that the project is about a year away from handover, and which gives enough time for buyers to arrange their down payments and initial installments of 30 to 40 per cent. It also means less time spending on their rents and EMI (equated monthly installment) on mortgages.
Developers must start offering payment plans only after they complete building 50 per cent of their projects
“What property owners cannot do is keep paying for three or four years, which is the average size of a project build up, before they take delivery.”
There are other developers who are thinking out of the box - Sun and Sand launched a project at International City where it offered schemes that would safeguard buyer interests if they were to lose their jobs at any point.
As per the sales and purchase agreement, if a buyer bought while still under construction, and if he were to lose his job after paying 40 per cent or so, the developer will not forfeit the deal.
“They got two options – he could stay in the unit for three years without paying rent, or if he was an overseas buyer, he would get three years’ rent as compensation,” said Sailesh Israni, Managing Director at Sun and Sand.
Will developers listen?
A lot will depend on how well, or otherwise, current off-plan project launches are faring. Market feedback suggests that in the first two months, off-plan sales took a further dip, even at projects that were rated as surefire successes. They say it’s further evidence that buyer attention is gradually turning towards ready homes.
The irony here is that off-plan launches in 2017-19 did well despite carrying higher prices than those ready homes available in the secondary market.
For that, banks and their unwillingness to raise their exposure to real estate is to blame.
“There are still challenges when it comes to the LTV (loan-to-value) ratios currently in place, which require a 20 per cent down payment for expatriates, plus other fees,” said Stevens. “This has been, and will continue to be, a big deterrent for secondary sales as people simply do not have that amount of cash readily available.”
Loan-to-value ratio for expats taking out mortgages in the UAE
Nub of the problem
Dubai’s property market is still geared towards investors, with cash, or the well-off residents, who can easily get into the property market with banks willing to lend to them.
But for the vast numbers of salaried mid-income, buying requires a leap of faith. It will take much more convincing for them to buy now and then see their home value - and life earnings - see a value erosion a year or two down the line.
Asteco, in its recent report, suggests that property values could stabilise this year, “particularly for newly launched projects as development costs are approaching the lowest practical level. Secondary property prices are, however, expected to record additional drops….”
If yes, will a resident who’s renting now want to buy?
Especially as “further pressure on rental rates across all asset classes is expected for the year as economic uncertainties limit newcomers to the market.”
In other words, residents would feel they are better off renting than putting their faith in a property, which could yet lose value by the time they move in.
Why aren't more developers doing lease-to-own?
In a property market where the overwhelming majority still rent, developers should be offering more lease-to-own choices. That is, people move into a home and they pay the "rent" as payments to buy the home from the developer.
But, according to John Stevens of Asteco: "The much discussed lease-to-own scheme has not actually been fully realised yet, and has served more as a marketing tool to developers looking to dispose of their ‘harder-to-move’ stock.
The lease-to-own scheme has served more as a marketing tool to developers looking to dispose of their ‘harder-to-move’ stock
"What generally happens is that developers are offering long-term (up to 20 years) post-handover payment plans, which means installments (whether monthly, quarterly or annual) are low, similar to rental payments.
It’s not that Dubai developers don’t know how to do rent/lease-to-own. During the 2009-10 crisis years, some of the leading developers offered buyers the option to turn their rental payments into monthly installments.
In fact, some private property owners offered the same option to their tenants. But at that time, Dubai’s freehold market didn’t have the massive supply of newly completed homes.
According to Stevens, the market could see a return of such offers. “Just recently, the Dubai Land Department (DLD) announced the launch of the Real Estate Investment Opportunities (REIOs) initiative, under which several investment products will be offered... including a lease-to-own system. No further details have been announced yet."
Guess, potential end-users need to wait and watch out for that.