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Back-weighted Dubai property plans soar in popularity among investors

2015-08-08 04:19:01

The number of developers in Dubai offering back-weighted payment plans has risen dramatically in a bid to tempt more buyers into the marketplace, according to new research.

The report from ReidIn/Unitas, titled The Curious Case of Payment Plans, states that 55 per cent of all off-plan property launches now offer back-weighted payment terms – up from 29 per cent two years earlier.

Visitors at the Damac stand at Cityscape Global in Dubai look at a model of a development to be built.

The percentage of schemes where three-quarters or more of the money had to be paid upon completion has fallen in the first half of 2015 to 50 per cent from 72 per cent in 2013.

Similarly, the schemes where the buyer can defer 50 to 100 per cent of payment until completion have jumped to 25 per cent from 11 per cent.

Sameer Lakhani, the managing director of the report’s author, Global Capital Partners, says there are several reasons for developers’ greater generosity, but the strengthening of the US dollar – to which the UAE dirham is pegged – is the primary one.

He said that since the Dubai government introduced regulations allowing non-UAE citizens to purchase freehold properties in 2002, the dollar had been in a long bear cycle, which only began to change in 2014. Since then, it has rallied sharply.

“All of the forecasts from various investment banks suggest that it is continuing to get stronger,” he said. In the past 12 months the dollar has risen over 20 per cent against other major currencies.

He said the Dubai property market has been underpinned by foreign buyers, but that many of these were now finding property more expensive. Dubai prices have dropped by 8 to 20 per cent from their peaks in mid-2014, but the rouble’s devaluation means that the price being paid by Russian investors has effectively increased by 20 per cent.

Developers have two reasons for offering these dramatically more generous payment plans. One is to entice end-users who are not able to stump up the larger deposits required since the UAE introduced a mortgage cap in October 2013, which means that expat buyers need to find 30 per cent of a property’s value up front.

The other is to entice the type of buyers that the cap was introduced to foil – those who used lots of leverage in a property deal to make a quick profit. The only difference now is that it is developers, as opposed to the banks, allowing them to do this.

“With off-plan activity, a small percentage of change magnifies the return for investors. So if you have a 10 per cent down payment and the price increases by 10 per cent, you’ve made a return of 100 per cent on your equity,” Mr Lakhani explained.

“Leverage is a strong word, but there is often interest in it because it lets you juice up your returns.”

Mr Lakhani said private sector developers have been offering the most generous payment plans, with government-related entities like Nakheel and Emaar Properties relying on their “brand equity”.

However, he added that if the dollar continues to strengthen they too may feel the need to offer more generous terms to attract overseas buyers.

“We are already starting to see it in the case of Aldar [in Abu Dhabi] and Dubai Properties, and we think this trend will continue.”

Figures published this week by Dubai Land Department show that of the Dh53 billion invested in the emirate’s property market during the first half of 2015, Dh17bn came from GCC Arabs, Dh6bn from non-GCC Arabs and the remaining Dh30bnfrom investors in 120 other nations.