Easy off-plan payment plans spark fears of another Dubai property bubble

Terms being offered that make it much more affordable to buy risky off-plan property than to buy existing second-hand homes.

The Emaar Pavilion was the site for sales of the new Mira Oasis townhouses. People queued up early for a chance to purchase the popular properties. Clint McLean for The National

Property developers in Dubai are offering such relaxed payment plans that they are threatening to fuel another off-plan bubble.

As hundreds of unbuilt homes go on sale this weekend in Dubai, property experts are warning that the payment plans they are sold through are being offered at terms that make it much more affordable to buy risky off-plan property than to buy existing second-hand homes.

Almost benign payment plans require buyers to put down very small deposits until a property has been completed.

They are being introduced by developers at a time when new mortgage laws have been introduced by the Government, pushing up the amount of money buyers need to put down as a deposit and making it harder for many to stump up the cash necessary to buy.

“The trend we have been seeing over the past six to 12 months is that payment plans are getting more relaxed, which makes conditions more favourable to speculators,” said Sean McCauley, the director of agency services at Asteco in Dubai.

“We have even seen payment plans where buyers are asked to pay just 20 per cent while the property is being constructed and then 80 per cent upon completion in three years time, so basically people are paying nothing until completion. We’ve seen other plans where payments continue for two years post-completion.”

The news comes as Emaar Properties, Dubai Properties and Lootah Real Estate are releasing 845 new homes on the outskirts of Dubai onto the market.

“It used to be the case that off-plan property was priced at about 10 to 15 per cent cheaper than completed homes but that gap is getting smaller,” said Matthew Green, the head of research at real-estate adviser CBRE’s Dubai office. “Now off-plan developers are not factoring in much of a discount at all. The payment plan factors that in and is considered enough of an attraction in itself.”

Around 200 eager buyers lined up today at Emaar’s sales offices in Dubai, Abu Dhabi and Karachi as the Dubai developer started to sell 480 three and four-bedroom townhouses at its Mira Oasis development next to Global Village.

The queues were long despite the fact that Emaar had not even revealed the prices for the homes it was selling.

“The launch of these new off-plan schemes shows that developers still believe that there is a market for off-plan properties, despite the fact that there is a significant number of existing schemes on the market at the moment,” said Craig Plumb, the head of research at Jones Lang LaSalle’s Dubai office.

“The reason for this is really that new mortgage laws in Dubai push up the amount of deposit required to buy, while at the same time off-plan payment terms make purchasing more affordable.”

At Lootah Real Estate Development’s Shamal development, a 1,100 square feet apartment costs Dh625,000 off plan. An initial payment of 10 per cent – Dh62,500 – is required as a reservation fee.

A further 10 per cent is required after three months and another after six months. A further 20 per cent is due as building progresses. The final 50 per cent, Dh312,500, is payable upon completion – for which the buyer is likely to be able to get a mortgage, which would require a deposit of Dh78,125.

In comparison, on Dubizzle a slightly smaller, already built 989-square foot studio apartment in Executive Towers in Business Bay is on the market for Dh1,485,000.

Under the UAE’s recently introduced mortgage rules, an expatriate wanting a mortgage on that property would have to pay a deposit of 25 per cent of the value – Dh371,250 – and then he could get a mortgage for the remaining Dh1,113,750.

For properties costing more than Dh5m the numbers become even more unattractive, as expatriate buyers are required to put down a 35 per cent deposit, rising to 40 per cent if the property is a second home.

The Dubai Land Department yesterday said that Dh35 billion had been invested in the emirate’s real-estate sector in the first quarter of this year, a 57 per cent rise on the same period last year.

Speculation on off-plan property sales was one of the elements blamed for fuelling the Dubai property bubble that burst dramatically in 2008.

As property prices rocketed, speculators turned to “flipping” off-plan homes by putting down small deposits on houses that were little more than a hole in the ground and an illustration in a fancy brochure, and then selling the contract on for a quick profit, inflating prices even further.

The practice has prompted companies such as Emaar to attempt to curb speculation by saying it would refuse to transfer the names on purchase agreements until buyers had paid up to 40 per cent of the value of the home.

But brokers say that speculators have been getting around the new restrictions by drawing up their own agreements to sell, regardless of the required contractual milestones.

“The risk with this market situation, with developers selling out phases in short periods, is that once they have sold, they then have the finance to move on to other projects and the development pipeline increases,” Mr Green said. “The risk is that developers can escalate the pipeline quickly to a situation where there is an oversupply, and that is when you could see another correction.”

According to CBRE research, Dubai developers are building 17,000 homes that are expected to be completed this year, while a further 65,000 are planned to be ready over the next four years.

Emaar first marketed 188 homes at its Mira Oasis scheme last April on a first-come-first-served basis at prices starting from Dh988,888. The sale attracted crowds of more than 400 people, which became unruly and eventually police were called to restore order at the event.

Meanwhile, a UAE investment bank said yesterday that given the recent surge in property prices about 17 per cent of the potential expatriate buyers had been priced out of the market with a further 16 per cent at risk of no longer being able to afford a mortgage.

“Six out of 10 residential transactions being concluded today involve cash rather than home finance. Five out of 10 transactions involve foreign buyers,” Arqaam Capital said.

“We find that much of the YTD price appreciation in prime apartment units is a function of foreign interest in UAE residential assets, due to perceived appeal in terms of capital preservation and yields.

“This has had the effect of pricing out a portion of the resident population interested in home ownership, but will also continue to absorb supply in 2014.

“A retracement in foreign demand will likely spur some slowdown in price evolution by 2015.”

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