At the beginning of 2017 Dubai’s residential real estate market appeared to be in the early stages of an upswing, in large part because of a surge in off-plan sales. While off-plan sales in the emirate increased by 45% quarter-on-quarter (q-o-q) in the first three months of the year, according to UK-based property firm Chestertons, momentum picked up further later in 2017, when the number of off-plan deals grew 86% q-o-q in July-September after a slump in the second quarter. Much of this activity took place in Dubai South, where an enormous amount of construction is currently under way. According to local property analysts and other market participants, the increase in off-plan sales is an indication not only of rising confidence among local buyers, but of the steadily improving maturity of Dubai as a destination for sustainable property investment.
Many local players have expressed optimism about residential activity in 2017 and beyond. “What we have witnessed in the last year has been a steady month-over-month increase in transactions as activity and interest continues to ratchet higher,” Hussain Alladin, head of research at Global Capital Partners, a Dubai-based private equity firm with interests in real estate, told local media in April 2017. “This trend will continue and even though there will be a seasonal dip in the summer, we should continue to witness a steady year-over-year increase in transactional volumes.”
History Of Off-Plan
Off-plan sales refer to the purchase of property before it has been fully completed. The extent to which a development is off-plan – i.e., how far construction work has proceeded – generally corresponds to the discount available to buyers. A project that has not yet begun in earnest, for example, or one that is only half completed, may be available to a buyer at 30% off the final sales price, while those closer to completion may be available for 20% or 10% less. The discount varies depending on the expected value of the property, the reputation and size of the developer, and the location of the project, among other factors. “In the initial launch phase, attractive prices can be secured by up to 30% below market value in comparison to completed properties,” David Godchaux, CEO of Core Savills, a Dubai-based real estate company, told local media in January 2017. “Bulk transactions usually see between a 10% and 15% reduction from advertised pricing, and if [buyers] are looking to buy a full building or development, this can be discounted further.”
The fact that off-plan sales have been expanding at such a rapid rate in recent years is surprising to many in Dubai’s real estate sector, particularly those who were around during the 2008-09 financial crisis. Indeed, off-plan deals are widely understood to have contributed to the real estate bubble that eventually gave rise to the crisis itself. During the first eight years of the 2000s, off-plan sales gained popularity very quickly, driven in large part by speculative investors looking to turn a profit “flipping” properties. These investors would sign the paperwork to purchase an off-plan property, make the 10% required down payment, and then resell the property at a premium before construction had been completed. In this way, some investors were able to earn considerable profits, largely at the expense of end-users. This speculative activity played a central role in pushing up real estate prices in the emirate in advance of the 2008-09 market correction.
New Oversight
The current increase in off-plan sales is taking place in a fundamentally different market environment than previously. Following the 2008-09 financial downturn, which negatively affected Dubai’s property activity, regulators in the emirate and at the federal level set out to ensure long-term market stability. This has resulted in the introduction of a range of new regulatory measures and improved oversight throughout the real estate and banking industries of the UAE. Key pieces of legislation in this effort include seven laws introduced during 2013-15, which were aimed at ensuring a recovery in property values without fuelling another price bubble; protecting investors and end-users; and easing the availability of development finance to responsible builders and investors. These regulations were implemented alongside various programmes introduced in the wake of the downturn to support the UAE’s economy, such as the Tanmia initiative, which assisted developers in restructuring stalled projects, and the Tayseer programme, which facilitated better, more transparent cooperation between the banking sector and property developers.
However, the most substantial change to the regulatory environment was the issuance in October 2013 of new loan-to-value (LTV) limits for residential mortgages. Under the regulations, which were imposed by the Central Bank of the UAE, UAE nationals are allowed to borrow up to 80% of the value of a first-home property – worth up to Dh5m ($1.4m) – while expatriates may borrow 75%. If the property is worth more than Dh5m ($1.4m), the mortgage cap is reduced for both nationals and expatriates, to 70% and 65%, respectively. For a second house or investment property, the limit was set lower, at 65% for nationals and 60% for expatriates. In a separate set of regulations issued in 2013, the central bank set the maximum LTV mortgage ratio for all off-plan purchases at 50%, regardless of the proposed end use of the property.
These new rules – in addition to a raft of regulations aimed at enhancing banking sector practices and oversight (see Banking chapter) – had the intended effect of shoring up Dubai’s property market during the 2013-14 period. “Newly implemented regulations on loan concentration and real estate exposure for banks will help protect the soundness of the banking system, which has remained amply capitalised and liquid,” Harald Finger, an advisor at the IMF, told the media in late 2014. “The new loan concentration limits will help contain risk to banks’ balance sheets in the context of newly planned mega-projects.”
Recent Developments
Even as this legislation was being drawn up, the off-plan market was beginning to once again gain a foothold in Dubai. In April 2013 Emaar Properties, one of Dubai’s so-called big-three developers (see overview), executed a series of successful off-plan sales during the construction of its Mira Villas and Townhouses project on Al Qudra Road in Reem. Buyers who were able to commit to purchasing property during the first phase of the project paid Dh988,888 ($269,000) for a villa. These first-phase villas were handed over to buyers in 2016. Since then, local press reported, a number of the villas have reportedly been resold at twice their original cost.
In 2016-17 off-plan sales gained new traction in a regulatory environment that most developers and investors agree is better suited to restrain the types of speculative activities that led to the 2008-09 financial crisis. Much of this confidence has to do with the mortgage market, which is considered to be maturing at a rapid pace. Very few UAE banks offer off-plan mortgages, and those that do are extremely selective about the developers and projects they choose to finance, with most requiring a project to be at least 50% complete before they initiate lending. Similarly, many banks require buyers to pay a considerable percentage of the cost of the property upfront before they issue a mortgage for the remainder, thereby protecting against speculation. “Banks offer financing only after the first 50% of the payments have been completed by the buyer,” Carol Monis, head of mortgages at MortgageME.ae, told local media in January 2017.
These stringent practices have had the unintended effect of making it difficult for some end-users to acquire property in Dubai. Indeed, the condition that a buyer must pay 50% of the value of a given piece of property out of pocket is a major hurdle for many purchasers. A handful of major developers in Dubai have worked to overcome this issue by developing innovative financing schemes. For instance, a number of builders have offered 30/70 payment plans, whereby a purchaser will be required to make a 30% down payment on a property before completion, and then pay the remaining 70% upon completion. “This makes it much easier for end-users to get mortgages, as completed projects get up to 75% financing,” Monis said.
Following The Trend
The 86% increase in the number of off-plan deals in the third quarter of 2017 as compared to the previous three months was largely expected after a slow summer. Dubai’s real estate market is highly seasonal, with the hot summer months traditionally marked by a drop in transactions across most segments. Activity bounced back during July, August and September, with the value of off-plan transactions jumping 118% q-o-q to record Dh4bn ($1.1bn). This matched a drop in the volume and value of completed projects, according to Chestertons.
“In the fourth quarter we expect to see further corrections of sales prices and rents,” Ivana Gazivoda Vucinic, head of advisory and research at Chestertons MENA, told local media in October 2017. “A slight pick-up of completed unit transactions is expected. This will, however, have a negative impact on off-plan sales transactions, which we expect to decline and then stabilise.”
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