Payment plans: Developers in Dubai need to exercise restraint

When the head of a major listed developer in Dubai sounds the alarm over extra generous post-handover payment plans which are a dime a dozen in the market today, it's time to sit up and pay heed. While the phenomenon of post-handover and back-ended payment plans was pioneered by smaller private sector developers in Dubai in 2016, the tactic clicked with buyers, mostly end-users who had limited access to mortgages for off-plan properties. Sensing a formula for success, the larger master developers too joined the fray and the concept has since gone mainstream.

But like they say, too much of anything is bad. Market commentators warn this could be the making of a bubble since smaller private developers run the risk of inadequate funds for construction, with the majority of money coming in well past handover. The practice could also attract flippers, who can commit to a project by paying just 5 or 10 per cent of the property's sales price, make double digit returns and exit the investment without staying the full course of the development cycle.

Post-handover and back-ended payment plans translate to reduction in margins for developers. As per new guidelines by the Dubai Land Department, the developer needs to acquire the land with 100 per cent payment before they can start construction. With the majority of investors' money forthcoming only after handover, developers will have to self-fund construction and channel the money to escrow accounts. 

End-user buyers are advised to take in-principle mortgage approval with a potential finance option to safeguard the post-handover payments. However, there can be a possibility that validity of the pre-approval would expire and hence the timing of the loan application is critical. But before plunging into property investment, a close look at finance is very important as most banks follow stringent guidelines with off-plan projects. Moreover, understand which banks will fund the project and whether the buyer's profile will qualify for a loan or not. Link