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Is off-plan development dead in Dubai?

"Unfortunately during this period a lot of the completed developments actually proved to be sub-standard and when married against the original glossy brochures it was hard to believe that we were viewing the same development. However, the early years of the new millennium boasted attractive payment plans. Many re-mortgaged their existing UK property to release funds in the region of £30k to £60k. This was all that was needed, with no further payments until completion, when the balance of normally 70% was required to take ownership.

"During this period investors flocked to Spain and headed back to the UK with just a brochure and a signed reservation form to confirm they had purchased. By completion the property would have increased in value and the 70% you needed to borrow (courtesy of Spanish development friendly banks offering far lower rates than the UK) would be based on the value at completion. Properties during the construction period often increased by more than 30%, so you could borrow enough to pay off your UK re-mortgage thus allowing you to then rent your property in Spain when you were not using it and the rental would pay the mortgage. Easy!

"Forward to 2003 and the same was happening in Dubai, but the deal was different, no 70% back end payment and no mortgages. However the properties were much cheaper, 10% to reserve and 10% every quarter for two years with a final payment of 10%. This made perfect sense as it allowed us to purchase property that would be mortgage-free at completion. Properties were increasing at a tantalising 35% per annum and it was a win, win situation.

"So why have the international off-plan markets suddenly stalled? Firstly, International developers have been hit hard by the global financial crisis and construction finance promised to them by banks has in many cases been withdrawn. This has resulted into some developers going bankrupt and clients losing money, further reducing confidence in international off-plan sales.

"In the case of Dubai there has been a further twist. The developers have struggled primarily because the Master Developers have delayed by up to 24 months on handing over the land before construction can begin.

"The problem herein lies that this makes it impossible to construct at original prices as in many cases the price per sqft the property was originally sold for is under the bare minimum price per sqft for construction. A catch-22 situation and one that is far removed from the heady days of 35% per annum increases.

"The good news is that the government has set up RERA, a government arm that is a regulatory body whose role is to protect the investors. Strict laws have been introduced for developers and all clients’ money must now be paid into an escrow account. Unfortunately marry this with the credit crunch, which hit Dubai in October 2008 and the problem becomes amplified. Ultimately, credit crunch aside, RERA will make Dubai one of the safest international areas for clients to invest into and once confidence is restored, which in my mind may last as long as 18 months, investors will flock back to the UAE.

"Is off plan dead? The answer is ‘no’. People like buying off plan, as the payment plan works for them and they can live the dream – seeing virtual tours and scrutinising glossy paraphernalia. All that is happening right now internationally is that investors are being very cautious when it comes to spending their money and are basically in a holding pattern ready to swoop again when confidence is restored.

"Off plan in Dubai is certainly not dead, but the days of the ‘stupid investor’ have almost certainly gone; developers will have to raise their game plan in order to survive!"

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