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Revealed: Off-plan purchases to blame for rent drop in Dubai?

Buying or renting a new house is a momentous occasion, and not one we often take likely. Even if rent in Dubai has dropped by 5% in Q2, according to data by Cavendish Maxwell (CM), one needs to take a step back and consider their investment.

According to Matein Khalid in a report for the Khaleej Times, off-plan sales have grown significantly, accounting for 58% of total sales in Dubai in Q2 2018. This comes as a surprise as many homes and villas remain vacant in the prosperous Emirate.

Why are people opting for off-plan purchases, and are there any risks involved?

Off-plan offers great rewards, for a risk

Off-plan purchasing in and of itself is a risky endeavor. It is easy to be scammed into buying properties from developments on the basis of vacant promises and beautifully-rendered 3D previsualizations.

Earlier this year in the UK, buyers wooed in by illustrious projects in Liverpool and Manchester, reportedly worth $463.5 million according to the Guardian, lost their investments when the projects stalled amidst accusations of fraud.

James To Kun-sun, a member of Hong Kong’s legislative council, estimates more than 700 buyers have lost an average of $58,000 in Hong Kong alone, with many more across Asia and beyond.

Yet, given the risks, why are buyers in Dubai falling head over heels for these projects?

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Why are rents dropping?

Off-plan purchases have had a major hand in causing a drop in rent values.

Often, the allure of off-plan projects is their phased development, permitting payment in installments as construction progresses.

Furthermore, buying off-plan is often cheaper than purchasing completed projects, which is another factor that proves tempting for investors.

According to Cavendish Maxwell’s report, this surge in off-plan purchases is one of the main reasons for the drop in rents.

“Buyers continue to be spoilt for choice in the off-plan market thus forcing developers to offer special incentives such as aggressive payment plans, fee waivers and others to differentiate their projects,” Cavendish Maxwell’s report explains.

Another cause has been the construction boom in the country, which has resulted in a surge in vacant homes, villas and apartments. Even “the office market has a glut of vacant space, with occupancy ratios in certain areas buildings in the 55-60% range,” Khaled explains.

It seems that supply has significantly eclipsed demand, and many of the new housing units remain vacant despite lowering their prices as landlords of occupied buildings are dropping their prices to keep their current tenants.

The economic slowdown the country has been experiencing following the slump of oil prices in recent years has also led rent values to dip. Improving oil prices in the coming years should potentially bolster these figures.

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Off-plan isn’t always the way to go

According to Khaled’s report, off-plan purchases in Dubai have not been as rewarding as initially believed.

“I have so many friends who waited three to four years for their luxury flat only to find out that prices were 30-40% lower, if their flat or villa could be sold at all,” he said. “Rents are now falling faster than capital values, clear evidence metric of a glut in existing units, let alone development pipeline.”

“There is absolutely nothing to suggest that there is an imminent bottom in rents and capital values,” he continued. “Property markets, like all asset markets based on leverage and credit cost/access, are inherently cyclical. An investor who cannot analyze the credit cycles can and will be fleeced by off-plan sharks with armies of commissioned brokers motivated by even 7% payouts.”

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The key to purchasing off-plan is to do your research

Planning to get on the off-plan bandwagon by securing the home of your dreams ahead of time? The Abu Dhabi Commercial Bank (ADCB) has tips for anyone interested in making an off-plan investment.

-Infrastructural development

Think of the future! Shortlist the areas you would like to live in. All new developments should have accessible basic amenities, so make sure that you have seen the development plan to ensure these are in place.

-Track record of the developer

When you start the process of deciding which off-plan property to buy, conduct thorough research of the developer and check their track record. One authentic method would be see if the developer is registered with the respective real estate authority.

Make sure all deliverables promised to you are also signed on official papers as proof of your agreement.

-Payment Plan

The biggest advantage of buying off-plan property is that you can stagger the payments as per the progress of the construction.

One option to help with your purchase is to take out a bank loan. The maximum loan to value during construction period is 50%.

-Handover and completion date

The most common issue that a lot of buyers face when buying off-plan property is the delay in the handover. Therefore, real estate authorities in the UAE have introduced strict regulations that must be met by the developer before selling units in a project.

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