The sudden wave of cut-price off-plan real estate sales in Dubai should set alarm bells ringing. Have developers suddenly found a way to build a cheaper product to meet customer demand, or are they desperately trying to pull in the last punters because they are getting short of cash?
In business survival is the key when a market begins to weaken, and keeping the cash flow machine pumping out the necessary liquidity to stay afloat is absolutely essential.
Therefore, when advertisements start to appear offering the most amazingly low priced deals on apartments you have to wonder what is going on. Younger colleagues might instantly jump to attention and ask whether this is their chance to get on board the great Dubai real estate boom.
But we have to go back to basics. Who is doing the selling? Is this a Dubai Government backed entity? Or is this a private sector developer which already has a number of projects in progress, if not actually under construction?
If you are talking about the second category, or even the first in some cases, you need to ask yourself, when will this project actually be delivered? There is also a supplementary question for a private developer: will it ever actually be delivered?
For in real estate corrections around the world the biggest losers are people who invest their money with developers which go bankrupt. It is a worldwide phenomenon and just a fact of business life that has not been seen in Dubai yet because the freehold market is so new.
For it is not only buyers of off-plan property who take a risk, the biggest risks are borne by the developers themselves. They take the decision to go ahead with a project and fund it.
They also get the market badly wrong on occasions and proceed with developments when they ought to be cutting back their operations, or seeking to sell out to another developer. But that is when their clients are also at the biggest risk, as they may go down together.
How much money do clients get back when a developer goes bankrupt? In most markets there is a legal procedure and it takes years to complete and the pay out is only a fraction of the original investment. So take care about buying a bargain that might turn out to be a tragic mistake.
Look at this situation another way: Dubai construction costs have been soaring over the past few years. How can developers possibly turn around and offer cheap prices on apartments now? They might well cost more to build than they are selling them for.
So why are they doing it? Cash flow is the only logical answer, and buyers should beware.