Off-plan gives way to long-term leases

Insight Developers may have to abandon their traditional reliance on off-plan sales and switch to tying residential and commercial clients into long-term leases.

A building to-let in downtown Abu Dhabi: developers may have to secure long-term leases if they hope to raise finance for new projects.

Developers may have to abandon their traditional reliance on off-plan sales and switch to tying residential and commercial clients into long-term leases, if they hope to secure bank loans for future projects, according to industry experts. This would mark a sea change after investors in UAE property typically bought off-plan until last year, when the whole market for property financing collapsed. "We are in for a dramatic change on how property financing will be done," said Michael von Uffelen, head of corporate finance at Arqaam Capital, a regional investment bank. "The current modus operandi of one-year leases that are renewed annually no longer works. In order to get property financing, you will need extended leases."

Banks will remain reluctant to jump back into lending for property until developers can demonstrate clear income streams, for example through long-term leases. "The whole market is moving from an off-plan market to an end-user market," said Melhem Samaha, an investment banker at Credit Suisse.The once booming sector has been battered by massive oversupply ? 32,000 homes are expected to come online in 2010 in Dubai alone ? that has caused sharp price declines. In addition, liquidity dried up, making banks reluctant to lend and leading many developers to stall or cancel entire projects.

"Bank financing for real-estate is dead. Before, the banks used projections, they did not care about the cash flow but only about assets. Now the developers must demonstrate an income stream," said Mr von Uffelen. Financing experts are now advising clients to structure their schemes along the UK or US model: Developers typically take out a bridge loan to finance the land purchase and subsequently pay for construction based on pre-commitments by future tenants. Commercial tenants mostly have 15-20 year leases which are periodically adjusted to inflation. The income stream then serves as collateral for banks.

Local developers are now starting to emulate that model. "We are dealing with a number of clients in the real-estate space who are trying to generate a product which can generate long-term leases," said Mr von Uffelen. Central Park, the latest project by Deyaar is a case in point. Instead of pre-selling offices in its 45-story commercial tower located in the DIFC, Deyaar is looking to commit clients to medium- to long term leases.

"We are testing investor appetite here," says a Deyaar spokeswoman at the Citiscape stand. "We are seeing whether investors are looking to lease or rather buy the property." Until last year, cheap funds paired with abundant optimism did not make it necessary for either developers or banks to come up with alternatives for property financing. According to Nicholas Maclean, managing director at CB Richard Ellis, a property consultant, companies are ready to commit to long-term leases. Some have already done so in the past. Several large international banks signed 15-year leases when they opened their regional headquarters in Dubai in mid-2008.

Where leases are already in place, they tend to be far shorter in the UAE than elsewhere. Most companies leasing in the DIFC have leases between two and five years, adds Mr Maclean. [e-mail] [e-mail]