Speculators hit, end-users gain finance

Last week Amlak Finance announced an important development in the local finance market. Amlak will now lend against independent property valuations, rather than restricting finance to the original selling price of a new property.

At first glance this is likely to inflate real estate prices, as buyers will be able to pay more than previously, and sellers in the second-hand market will have more buyers.

However, at the same time developers have been taking steps over the past couple of months that are making it much more difficult for speculators to make big profits in Dubai.

Thus the emphasis is moving towards helping the end-user of a property, i.e. the person who wants to live in it and pay a mortgage, rather than speculators whose aim is to turn a quick profit on the re-sale of a small down payment on a new property.

Over the past few months developers have been effectively raising the stakes in Dubai property by requiring investors to put down more money on each property. That means the percentage gain on a re-sale is lower than in the early days, and absolute gains will also probably be much smaller.

For example, on the Burj Dubai tower Emaar upped the deposit from 10% to 15% and there is an accelerated second payment of 15%; thus buyers quickly tie-up funds equivalent to 30% of the off-plan price compared with 10% in earlier projects.

The Jumeirah Beach Residence has taken a different tack. First freezing transfers of off-plan sales entirely, and then changing the transfer fee from 7% of the sale price to 7% of the market price; as market prices have jumped this makes a big difference.

Nakheel and Emaar have kept transfer fees at 2% and 1.5% respectively but the accelerated payment system is applied. Nakheel requires a further 10% payment, and the two developers are delaying the transfer of a property for two months in the event of late staged payments.

The whole idea is to tie-up more of a speculators' capital, and to bring the balance between the speculator and investor back into line. Incidentally, the developers are also reducing their own business risk by ensuring that they have cash-in-the-bank rather than obligations to pay from speculators.

When these moves are considered, you also have to keep in mind that the actual price of Dubai property has moved up substantially too. Hence life for the speculator is not likely to be nearly as easy as it was for the pioneers who made a fortune trading in plots on The Palm Jumeirah.

This is a very healthy development for the Dubai real estate sector, and should be a further consideration for end-users who are considering whether to buy their own homes or not.

Certainly it means that parts of the local real estate market that looked like a bubble earlier in the year are now removed from that category. A development where 30% of the cost is paid up-front is a very solid proposition, or at least a good deal more solid than it was with speculators putting up 10% deposits.

The Amlak Finance move on market valuations for mortgages is also part of the same phenomenon, as it means more money is coming into the market and that gains in property values can be more easily realized. Last week was a good one for the development of the Dubai property sector.