Dubai’s developers getting too generous on incentives

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Low upfront payments potentially expose them to greater risks, says Cluttons chief

Murray Strang, Head of Cluttons Dubai, said it will be good for the property market if all theinvestors who put in initial deposits stick on for the rest of the payments.

Dubai

It’s all very well for Dubai’s developers to talk about the high sales attained on their off-plan launches. But even better for them — and the property market itself — would be if all the investors who put in those initial deposits stick on for the rest of the payments.

This could well be the most critical aspect that the gradual upturn in Dubai realty transactions stays the course. “If the market falls off in any way, it does not matter how many are sold at the front end, because developers only receive 5 per cent or so of the investment,” said Murray Strang, head of Dubai operations at the property services firm Cluttons. “Developers are offering such appealing initial offers that it is a no-brainer (for buyers) to place the initial payment.

“The problem will be how many of the initial investors will stay if the market does not continue to show a steady increase in capital values.”

If all goes well and Dubai’s property market continues with the upward mobility, such concerns should abate on their own. The crunch period will be the two to three years from now when the majority of recent launches should be nearing completion. And it is on completion that buyers are required to pay the substantial part of their instalments.

Any dilly-dallying — or reneging — on payments would have serious consequences for developers directly affected and across the market. (And there are those projects where developers have been extra sweet with the incentives, allowing payments two or three years after handover.)

Since the second-half of 2016, Dubai has seen a flood of new off-plan launches. Developers felt there was no point in holding back on the launches until the market was in full-fledged recovery. Their intention was to mop up as much of the buyer interest that is out there, and it did produce fairly robust results. The first six months of 2017 has been the best in two years, in demand for off-plan and even ready properties.

On off-plan, developers are going more than the extra mile to win buyers without them having to spend much on marketing costs. “Yes, we are seeing a huge amount of supply at the moment,” said Strang. “These are considered safe because it’s smaller investments buyers have to put up at the moment.

“And they are seeing considerable incentives, whether on transfer fees, registration fees, rental guarantees, and plans that allow payment for two years and plus after completion. As a third-party consultant, I think that’s concerning.

“When you look at the developer’s bottom-line, they are having to work harder to sell their products ahead of others. Today’s deals are compromises taken by the developer, and at the end of the day, it’s lengthening their cash flows. Over the longer term, this is going to create a backlog of extra supply and lengthening returns to the developer.

“It’s only successful selling if developers do so at a price that leaves them with a profit.”

So, what are developers with launches in the pipeline to do? If they go ahead now, they will be adding to an already substantial build-up in off-plan capacity. And to get buyers, they will have to resort to ever more aggressive selling tactics. According to market sources, some developers are aiming to reach the 30-40 per cent mark on the construction side to have a better chance of finding buyers at a time when sizeable new supply is coming through.

If they decide to hold back from a launch and wait for the demand-supply side to stabilise itself, it adds to their costs. And not just that — “Other developers will have jumped into the spot,” said Strang. “Right now, most developers are trying to soaking up (buyer) appetite that others haven’t made the most of.

“By delaying, that can create issues and make it very difficult when you do launch. There’s nothing certain in terms of demand-and-supply levels balancing now let alone in two or three years’ time.”

Some developers, especially Dubai’s biggest names, are in the midst of rebalancing their property portfolio. Rather than focus exclusively on freehold, the likes of Nakheel are busy building up significant capacity in rental residential properties.

But this is not a tactic all can follow and expect the same results, Strang said. “The Dubai market changes extremely quickly and where developers have retained a slightly flexible design, they can change to adapt to the market. But you need capacity to retain those assets.

“If as a developer you build three towers and wait for the income to drip back through rentals, you need to be a big entity. It requires a sea change from the earlier strategy of developing something, sell and then having no involvement after three years because you have taken all your profits out of it.

“And rather than margins of maybe 20-30 per cent per annum for the three- or four-year period from sales, leasing for seven or eight years still brings rental returns in single figures.”

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