UAE: Understanding if the current market is better to invest in an off-plan or a ready property?

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An off-plan penthouse on One Palm in the Palm Jumeirah was sold for Dh102 million last year
Image Credit: Gulf News Archives

Dubai: If you are on the lookout for a suitable property to invest in, a factor you would be considering while choosing a property is whether it’s better to buy an off-plan or a ready property, and also if now is the right time in the real estate market to opt for either of the two options.

As these are questions that arise in the minds of almost every prospective buyer, there is often a need to analyse which option is the better of the two and weigh how once can time the market to help make a decision.

Over the years we have seen market trends that favour both, and both options have their respective advantages and disadvantages and therefore it is important to check the benefits and risks of both.

It goes without saying that while deciding, it is imperative to look into the current market conditions and make an informed decision that best benefits you. Also one should consider not only the immediate benefits but have a long term perspective and measure them as well.

What are off-plan properties?

Off-plan property is a property before a structure has been constructed upon it. Pre-constructions are usually marketed to real estate developers and to early adopters as developments so that the purchaser can secure more favourable finance terms from their lenders.

Aren’t off-plan properties risky?

On an international scale, there certainly is a risk associated with an off-plan property mostly due to delays or cancellations. But in Dubai, these risks are greatly reduced through the Real Estate Regulatory Agency (RERA) and Dubai Land Department (DLD) guidelines alongside the usage of escrow accounts – where funds are held in trust whilst two or more parties complete a transaction.

Authorities monitor the developers’ financial stability and also mandate them to provide a bank guarantee amounting to 20 per cent of the project cost to get an assurance of project completion.

Who buys off-plan properties?

Buying off-plan enables investors and homebuyers to buy a property at a lower price than if they wait for the construction of their chosen property to commence or when it eventually is completed.

In addition, buying off-plan may be the only way to get a property with a specific location or set of features as the choice may be limited once construction starts or finishes.

Property investors or property speculators purchase off-plan property with the aim of making substantial capital gains. This financial return may occur because developers who sell off-plan property often offer financial incentives or discounts to early adopters.

In addition, there may be an opportunity for capital growth in a rising market and with a development cycle of typically 12-24 months.

Off-plan property is typically deemed attractive if there is a high level of infrastructure in the immediate area such as a new educational institutions, hospitals or, or expresses roads, either already built or due to be built within the next few years.

Benefits of picking an off-plan property

Pocket-friendly entry into the purchase agreement: One can make a small down payment of 5 per cent to 10 per cent in order to enter into an agreement, as opposed to at least a 20 per cent down-payment otherwise.

Flexible payment terms: In certain cases, developers offer post-handover 2-5 year payment plans. The advantage of living in the property or renting it out before paying it off.

What is a post-handover payment plan?

In Dubai, when purchasing a ready or off-plan property (property which is available for purchase before it has been constructed) in Dubai, the payment terms are split into instalments which must be paid in several intervals. In the usual payment plans, buyers would complete payments of the entire unit upon the completion, or handover of the property.

Rental income: Rental income greatly helps to support paying off for the property; a benefit only off-plan property offers.

Custom developer offers: Developers have custom offers such as waiver of a percentage of the registration fees and/or discounting the service charges for three- to five-year period. This again aids in reduction your initial pay out to the developer.

Lower price advantage: Properties under construction are priced significantly lesser than ready properties. Early stage buyers can take advantage of this while also enjoying property value appreciation over the course of construction of the project.

Off-plan residences in Dubai Marina
Off-plan residences in Dubai Marina
Image Credit: Supplied

Drawbacks of buying off-plan property

If property values start to fall before construction is completed, the financing house may reduce the value of the loan or even deny financing, particularly if the buyer is buying the property as an investment rather than as a home.

The buyer may be contractually obliged to buy the property at the original price and so must make up the shortfall from other sources or risk being sued if the buyer pulls out and the promoter sells the property at a lower price.

Another issue with the off-plan property is that the finished property may not meet the buyer’s original expectations, either because of subjective reasons or because of material defects.

You are forced to make your decision purely on basis of promotional material shown by the builder, such as brochures, promo videos, etc. leading to unpleasant surprises on quality, time of delivery, etc.

Purchasing a project in a neighbourhood that is presumed to grow over a short span can have its own challenges arising from much slower growth, thereby adversely effecting your payment plans.

The constructor may go out of business before construction of the property is completed and the buyer may not be able to recover the monies advanced. There have been many cases of this happening in several countries worldwide, especially if the construction sector had been particularly hard hit by recession.

Benefits of picking a ready to move-in property

What you see is what you get: Against a project that is at its early stage, that leaves you facing a severe lack of information, one can check all parameters and make a purchase with complete information.

Location advantage: In most cases, ready projects are in prime locations wherein all infrastructure requirements have already been met and therefore make living convenient.

Quicker capital appreciation: The cost is going to be higher than an off-plan project, but the returns are greater. You can expect higher rental revenues and take advantage of constant market value appreciation.

Is the current market the right time?

Developers have largely held back from launching new projects last year, partly because they’re looking to sell newly completed units. Property consultants evaluate that when you see a good off-plan launch in the market, it’s currently getting snapped up very quickly.

However, the market has been driven in the last six to nine months more by domestic end-users who are looking for turn-key property that they can live in.

What is a turn-key property?

A turnkey property is a fully renovated home or apartment building that an investor can purchase and immediately rent out. Those same firms may also offer property management services to buyers, minimising the amount of time and effort they have to put into the rental.

Experts expect a peak supply of new properties to come into the market over the next 12 months, viewing off-plan projects to re-appear in 2021, when there is more certainty.

Developers are also expected to take advantage of improvements in the local economy against the backdrop of EXPO2020 Dubai.

Is it time to buy-off plan or a ready property?

At what point in the real estate cycle does an end of off-plan sales and a switch back to ready units occur?. When should the savvy investor give up on off-plan and move into the secondary market?

Off-plan property is not a great investment in a booming property market because these are typically near the peak, so when the project is delivered prices are on a downward trend.

Built property is better to buy at or near the bottom of the market as well, but because it is quite liquid you can keep investing in it as the recovery gets older without being too worried you will get stuck with it when the market starts to fall.

So it is better to invest in off-plan when the market is bad but you can see an end in sight as opposed to when it is roaring.



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