Risks & rewards - Buying an off plan property in UAE
Disclaimer: This article in its entirety was written by Mr. Omar Gull-Director & Head Performance Marketing at DAMAC Properties
While buying off plan secures you lower prices, there are a many risks to beware of from project delays, to market changes and more.
The main benefit is typically a lower price. Developers usually offer between 15% and 25% lower prices for off-plan and under-construction properties. The price keeps increasing as the project reaches completion. Also, after the project handover, you can mortgage and get up to 75% of the value as cash in your account and enjoy that at low interest rate or invest that in next property purchase.
The master developers demand and receive up to 80 per cent during the construction process (typically 3 to 4 years) and around 40%-50% in the first year. Some developers are offering 10% (to 30%) on booking/construction and 70% to 90% on handover and that is extremely risky.
Project Delays
This is the primary risk when buying off-plan project. With the post handover payment (70% to 90%) this risk becomes extremely high as such payment plans are based on speculation that the market will go upwards, however, if the sales of one or two projects by the developer slows down, this puts the entire project as well as buyers at the risk of delays and sometimes puts the project completion in jeopardy. Developers should act responsibly before designing their payment plans based on speculations.
To avoid any such issues, select the project from reputed developer that has construction linked payment plan and if the payment plan is very tempting, make sure that the project is de-risked by sales of over 50% to 70% inventory.
Market risk
UAE market is quickly transitioning into traditional end user / long-term investor dominated market like London, New York, Singapore etc. In any market in the world there exists a risk of real estate values going down from the time a off-plan property is purchased to the time it is handed over to the buyer. The opposite is also true, there maybe a price increase also during the same time (capital appreciation)
The best way to mitigate this risk is to enter the project at very early stage to get the best off-plan price (which is typically 15 to 25% lower than price of completed) and again buying with a reputed developer with track record of successful project delivery.
The main benefit is typically a lower price. Developers usually offer between 15% and 25% lower prices for off-plan and under-construction properties. The price keeps increasing as the project reaches completion. Also, after the project handover, you can mortgage and get up to 75% of the value as cash in your account and enjoy that at low interest rate or invest that in next property purchase.
The master developers demand and receive up to 80 per cent during the construction process (typically 3 to 4 years) and around 40%-50% in the first year. Some developers are offering 10% (to 30%) on booking/construction and 70% to 90% on handover and that is extremely risky.
Project Delays
This is the primary risk when buying off-plan project. With the post handover payment (70% to 90%) this risk becomes extremely high as such payment plans are based on speculation that the market will go upwards, however, if the sales of one or two projects by the developer slows down, this puts the entire project as well as buyers at the risk of delays and sometimes puts the project completion in jeopardy. Developers should act responsibly before designing their payment plans based on speculations.
To avoid any such issues, select the project from reputed developer that has construction linked payment plan and if the payment plan is very tempting, make sure that the project is de-risked by sales of over 50% to 70% inventory.
Market risk
UAE market is quickly transitioning into traditional end user / long-term investor dominated market like London, New York, Singapore etc. In any market in the world there exists a risk of real estate values going down from the time a off-plan property is purchased to the time it is handed over to the buyer. The opposite is also true, there maybe a price increase also during the same time (capital appreciation)
The best way to mitigate this risk is to enter the project at very early stage to get the best off-plan price (which is typically 15 to 25% lower than price of completed) and again buying with a reputed developer with track record of successful project delivery.
Personal financial circumstances
When buying a property off plan, if you plan to pay in cash your concerns are limited to the aforementioned risk (which is plenty for most), but if you require a personal loan or mortgage to complete, there is the risk that your financial circumstances may change. You might lose your job; interest rates might increase or the banks may alter lending policies. And even if you qualify for a loan, the bank may not lend you the funds you require. This risk increases in the case of post handover payment plans where developers try to lure the customer in by telling them that the post handover amount, 70%, can be received as home loan by the bank and change of banking policy or lower valuation of the project may lead to shortage of funds
To mitigate this risk, avoid payment plans that are dependent upon heavy loans. 50% loan amount is healthy and you can get that pre-approved before purchasing the property.
Quality risk
The architectural visualizations of the building will look as good as the company working on developing those, but will the developer deliver the product as expected? Established developers trade on their reputation and understand that the quality of the finished product will directly affect their brand and future sales. Others care less
To avoid this risk, simply buy from good developers who have strong reputation and brand, which they can't afford to dilute
To summarize the article, post handover payment plans might seem attractive but they put the development at stake and the risk is passed directly to the buyer. Such payment plans should be avoided at any circumstance, the only exception should be when project is de-risked by 50% to 70% inventory been sold. Also, it is important to avoid fly-by-night real estate developers or the developers that have delivered just a couple of projects
Source: Omar Gull
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