News of the death of the off-plan market has been greatly exaggerated. One particular segment has become vibrant recently, with a type of transaction that involves trading in what amounts to distressed debt. While there are no buyers for new off-plan properties, there is demand for trading in downpayments that have already been made. For example, anyone who paid a deposit of 5 per cent or 10 per cent for a property that was launched last year but which has now been put on hold - or the future of which is unclear - may be allowed by the master developer to sell this credit to someone else who already has an off-plan property elsewhere with the same developer. They sell at a discount, but it gives them a chance to get some of their money back, and it takes the liability for future payments off their backs. Developers also avoid having to hand back cash to potential defaulters. Although some are reluctant to speak about it, big master developers in different emirates are allowing this trade in downpayments, including Emaar Properties, Nakheel, Rakeen in Ras al Khaimah and the Real Estate Investment Establishment (REIE), based in Ajman. The rules differ slightly from one developer to another but the principle is the same. "Some of them are called credit notes, some of them consolidation certificates," says Michael Michael, the sales manager of Landmark Properties, which closed a deal with Nakheel recently. "Initially, when the concept was introduced we saw a lot of credit notes trading in the market. We have seen this number reduce over the past weeks. Nevertheless, they are still being offered." Rajesh Sony, from the broker Bluechip Real Estate in Dubai, says that 90 per cent of his business is now in consolidation. "For instance, if I have a property in Mushrif Heights from Emaar and I have paid Dh500,000 (US$136,128), the developer allows this Dh500,000 to be transferred to another person's account, who owns another property with Emaar, and who owes further payments," Mr Sony says. The buyer usually gets the credit at a discount, generally of about 30 per cent to 50 per cent. The deals happen at brokers' offices. "Investor A comes to the broker and says, 'I have got that much credit with Emaar and I want to give it to someone who needs it'," Mr Sony explains. "Investor B will also come to the broker and say, 'I have to make so much payments to Emaar, but I can't afford the full instalment. I am happy to take some credits from someone at a discount rate. Find me somebody who has a credit'." Brokers thus become facilitators who put both investors in contact with each other. Both then seek permission to go ahead from the developer. "In the end, although investor A does not get the full amount from investor B, he is happy because otherwise his Dh500,000 are stuck. Whereas B, who has to make large payments, can do it at a bargain price. It is a mutual benefit," Mr Sony says. Investor A managed to get out of the market and has no more liabilities towards the developer, while investor B becomes an owner of a property at a lower overall cost. "Right now it is a big market," says Mr Sony, who deals only with Emaar and Nakheel. "We have been doing this for the past three months and 90 per cent of our business as a real estate company is now done through consolidation." Conditions are slightly different from one master developer to another. In Ajman, the REIE, which owns Marmooka City, a 206-building development, has allowed developers who bought land to consolidate with other developers but applied a 30 per cent penalty - on the payments already made - for each contract cancellation. In Ras al Khaimah, Rakeen, the master developer of two large mixed-use developments, allowed investors to transfer payments from Dana Island to Marjan Island, which is more advanced in construction. Rakeen does not apply a penalty but asks investors to refund the commission they had paid to the broker and sets deadlines for construction. According to Mr Sony, Emaar does not apply a penalty, but does not allow the final payment of a property to be made through consolidation and only allows investors who buy credits to do it once. Nakheel, according to brokers and investors who concluded consolidations, has a slightly different method. "Investor A will have to transfer his property to investor B first. Investor B then has two properties: one which is on hold by the developer and one which is continuing. He will then make a request to Nakheel to transfer the credit to the second one," one said. "Nakheel is charging Dh5,000 just to consider the application," says Arshad Hussain, who has invested in a flat in Al Furjan phase 2. However, for many investors, it offers a neat conclusion to what might otherwise be a sorry tale. By allowing credit consolidation, if all the investors in a stalled project transfer the money to other projects, the developer may call off the project without having to refund money to investors, Mr Sony says."This is a win-win situation between the developer, investor A and investor B. And the broker, who gets a commission. And it keeps the cash outflow to the minimum." Not all brokers are interested in this market because of its challenges. Consolidation generally takes four to 12 weeks. In the meantime, the money remains in the form of a cheque to the broker or an escrow until the developer agrees. If he does not, the money is given back to the original investor and the transaction cancelled. ngillet@thenational.ae
