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A beginner’s guide to development

2015-09-02 03:22:22

While planning a housing project, a new developer has to dedicate a lot of time and resources in properly understanding the local market, demographics, issues, government regulations, land prices, mortgage regulations and laws pertaining to construction and land ownership.

For example, in Dubai, there has been a sea change in laws and regulations  when it comes to freehold property and ownership of land between 2007 and 2014. At the beginning of the freehold movement in 2002, anyone could book a piece of land, start digging, sell artist’s impressions and earn profits before putting concrete in the holes. It was that simple and easy. This helped a lot of cowboys to make a killing without delivering property.

Rizwan Sajan

Evolution of the sector

Dubai’s freehold property sector evolved without regulation for a few years, until the promulgation of the property law of 2006 and the subsequent creation of the Real Estate Regulatory Agency (Rera).

From having practically no regulations to a matured regulatory regime, Dubai’s freehold property development sector has gone through a massive change within the past seven years, especially after the creation of Rera. Now, there is a firm set of rules in place to protect the interests of investors and buyers, which developers are bound to follow. This includes full payment for the land parcel, site preparation, payment of the fees, registering the land in the name of the developer, securing construction permits and opening an escrow account before one can start selling.

Needless to say, Rera has done a wonderful job in creating a firm regulatory  environment and culture of compliance, which is helping the property development sector. Now, a developer can’t withdraw money from an escrow account — the custodian of the investors’ and buyers’ money — without the inspection and approval of engineers and Rera officials. The release of  investors’ money is subject to progress in the construction of the project.

In this way, Rera and the banks are ensuring that developers do their bit during construction before collecting payment from buyers. The business has become more responsible. So, before entering the market, one has to understand these changes and dynamics.

How to plan

Leasehold and freehold projects need separate planning even if the target customers belong to the same social strata. A developer has to think of the rental yields while planning, and not be bound by Rera regulations on freehold property such as the phased payment scheme and escrow accounts.

Then comes the site selection. When selecting one, there are some primary things to consider:

Scale: The size and scale of the proposed project should be based on the needs of the target tenant population, organisational capacity and appropriate fit for the neighbourhood. For a developer, it is crucial to understand these dynamics. One has to develop the right property for the target customer base. Sometimes, the best property may not be the right one.

Type and construction: The type of housing to be built, whether scattered site, one- and two-family houses or larger multi-unit buildings, has a significant impact on the selection process. The construction approach — new construction versus rehabilitation— will also guide the search.

Bank finance facility is crucial in funding construction works. With a good credit rating, a debt-free developer could command a very comfortable interest or profit rate while negotiating credit facilities.

Location: As with all real estate decisions, the location of the site is critical. Factors such as access to transportation, employment opportunities, neighbourhood amenities, community-based resources and services, daycare facilities, public schools, family amenities and security should all be evaluated. A shift in the city’s urban development planning could also create opportunities.

For years, developers were reluctant to look at Jebel Ali because it was perceived to be far away. However, with the opening of the Al Maktoum International Airport and preparations for Expo 2020, it has suddenly gained momentum. Areas closer to expressways or public transport system are always in high demand as they help ease mobility. No one wants to get stuck in traffic jams for a long time every day.

Once a plan is mapped out based on these considerations, the developer has actually done nearly half of the work. The rest should be easy.

Acquisition or lease costs: The cost of acquiring or leasing a development site may be the overriding consideration for selecting a property. Many public funding programmes have a maximum acquisition or lease cost (total or per unit caps) that must be considered during the search.

Then comes consideration of the overall market situation — investor sentiment and the pricing movement — before one can embark on the project. Timing is important, as is pricing. The latter depends on the timing in most cases as well as location.

Besides, in real estate, one size does not fit all. A developer has to carefully choose which segment he or she wants to serve — the middle-income group or the high-end luxury segment.

A softening of the highend luxury market should not discourage a new developer. He could still find good demand in the affordable market space. However, affordable housing facilities are usually located close to downtown or central business districts. So a developer will find limited options in terms of site selection.

After all is said and done, a developer needs to have a strong cash reserve before entering the real estate business. If he wants to build a project with other people’s money, then strict discipline, personal integrity, organisational reputation and leadership play an important role in ensuring success. It all boils down to one thing: credibility.