Recovery of off-plan market to pick up steam from 2011 |
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A possible recovery of the off-plan market in Dubai may begin only from 2011, provided developers now build quality products and fulfil their commitments, real estate executives said.
Sana Kapadia, Vice- President, Equity Research at EFG-Hermes, said: "The recovery of the off-plan market in the UAE will happen only from early 2011. Any recovery before that is unlikely. Pricing plans would need to be tied to construction milestones as that will hold the faith of buyers in the real estate market.
"Investors are holding back payments because construction is not commencing and developers cannot construct because investors are not paying. Once this situation changes, we can expect a recovery in the off-plan market."
Chet Riley, Vice-President of Real Estate Equities Research, Nomura International, said: " The recovery of the off-plan market in the UAE is likely to happen only in early 2012. The over-supply of residential units in the property market needs to be absorbed in the next two to three years. It is unlikely that the off-plan recovery will happen before 2012."
Elaine Jones, Chief Executive Officer, Asteco Property Management, said developers must maintain the progress of their projects as per the schedule promised to investors while selling the off-plan units.
"If investors can see this, confidence will build once again on the off-plan market," she said.
What can developers do to revive the off-plan market once again?
Kapadia: I believe pricing plans need to be tied to construction milestones with up-to-date construction progress being conveyed to buyers to ensure confidence is maintained.
Moreover, tie-ups with banks/mortgage companies would help to ensure adequate funding is in place from the onset.
Riley: There is mistrust between developers and investors. Investors are holding back payments because construction is not commencing and developers cannot construct because investors are not paying. This is the stalemate the sector is caught in.
Implementation of escrow accounts by Rera and other regulatory agencies are helping to reinstate confidence but there will always be less risk attached to the secondary market than the off-plan market. Therefore, we believe developers would firstly have to significantly discount off-plan property sales against the market to compensate investors for the risk.
Secondly, the developers would have to subject themselves to a higher degree of scrutiny by customers to increase confidence levels.
Developers will have to work much more closely with regulatory authorities to ensure both parties' rights can be adequately protected.
Jones: The answer is two-fold. First of all, developers, who are in the process of completing real estate projects that have been historically sold in advance of project completion, need to deliver on the original commitments made to the owners through their marketing efforts and marketing collateral.
By this I mean the image that has been projected in brochures and advertisements showcasing aspects such as unit interiors, layouts and communal amenities. This will help to reinstate a level of trust and confidence in the off-plan market and may support home owners and investors confident of reinvesting in the off-plan process.
The second aspect will be an inevitable need for change in the actual process of sale.
Aspects such as construction-linked payment plan will help to alleviate the financial burden of holding real estate if the project is delayed beyond the proposed completion date.
What are the mistakes that developers must avoid in bringing down the off-plan market in the UAE?
Kapadia: Developers must avoid the trap of speculative payment plans that is two or five per cent initial deposit versus the bulk such as 50 per cent or 60 per cent at completion.
Riley: Speculation and flipping drove prices too high too fast and developers were guilty - to some extent - of creating this situation. Also the idea of phased sales or buyback offers with guaranteed returns left developers cash constrained. When the market reversed, they were left with a lot of unsold inventory or the promise of a guarantee they could not honour. Pricing and installment plans must now be directly linked to development schedules.
Developers with marginal developments tend to price them attractively with low deposits and large final bullet payments. This practice tends to distort the cash inflow/outflow mix and increased the reliance on short-term project financing.
Has Abu Dhabi's off-plan market been affected as much as Dubai's?
Kapadia: The Abu Dhabi off-plan market has not been affected as much as Dubai's as there is a smaller pool of investable product. However, defaults and returned inventory due to inability of the buyer to pay has occurred there too. Some developers, such as Sorouh, have been proactive by offering customers price discounts and revised payment plans, thereby curbing a higher rate of default.
Riley: There are similar instances in Abu Dhabi, but the issues are less visible and not as far advanced as in Dubai. Large Abu Dhabi developers have been quick to reconfigure developments and pricing structures to meet the market. However, we believe some of the smaller developers are facing same challenges as those occurred in Dubai.
Jones: All the markets we have operated in within the GCC have been affected. Abu Dhabi is no different. The highly-speculative investors who were using real estate as a trading vehicle has all but vanished now. What we have now are real end-users or long-term investors who understand that the purchase of real estate is typically advantageous when held for a minimum of five to seven years.
What are your estimates on the total off-plan units that should be ready by the end of this year and 2010? Will these estimates be met?
Kapadia: We had an annual expectation of roughly 25,000 units for Dubai, which we toned down to 18,000 in 2009. The majority of these would be off-plan. For 2010, we have similarly altered our earlier expectation of 29,000 units to 22,000. We believe supply could end up being lower than expected. About 15,000 units could come on stream in 2009 and 2010 versus the current average of 20,000.
Riley: We have consistently estimated 60,000 to 65,000 units would come on-stream over the next two to three years, which we see roughly split 50/50.
We estimated the supply pipeline had virtually halved this year, but it is reasonably visible with an average two to three-year build programme, so those developments which were sufficiently advanced would most likely continue. This is partially why we are seeing the emergence of vulture investing.
We are reasonably confident of our forecasts and believe the supply will be delivered in Dubai as predicted. This will create a supply overhang which will take some time to work through the system in the real estate market in Dubai. We are concerned about an 'unorganised supply' currently on hold and not captured by the various recording agencies. If prices start to correct then this unmeasured supply may actually come back on stream very quickly.
Do you think the revival of the off-plan market can pump up the real estate market in the UAE?
Kapadia: To some extent, but we believe the emphasis is moving more towards completed or soon-to-be completed properties as people are paying closer attention to quality, location, the developer and the overall attractiveness of the product. The off-plan will, probably, pick up again but the emphasis is likely to shift to more affordable housing and hence more moderate prices.
Riley: Any revival in the off-plan market would increase liquidity, but we are of the opinion it would be very difficult to create the same sort of off-plan market that existed in 2006 through 2008. The market now would be much more heavily scrutinised. Regulators would actively discourage speculation perhaps by requiring minimum hold clauses and so on, and developers would be much more conservative in the type and scale of projects undertaken. This, in our view, is actually beneficial to the stabilisation of market. Now, the supply- demand dynamics have to catch up before we start to see new off-plan schemes coming to the market.
Some say developing good show-home villas and townhouses and replicating the same quality into building the townhouse or villa can make the off-plan market surge?
Kapadia: Showing people what they could end up living in would help as people need to be assured of the quality of the property they are buying. But it is not the only factor.
People need greater confidence and liquidity also has to pick up.
Moreover, exogenous factors such as the performance of the economy, job creation and overall sentiment will all impact the pace of any improvement.
Riley: There are some developers such as EmaarEmaar
who are already well known for the high quality of their projects. We do not see the off-plan market resurging at all, but anything a developer can do to showcase their ability to produce a high-quality product and a track record of on-time delivery would help their chances.Jones: We have always believed the show-home concept has been important in any sales market.
Typically this is advantageous when developers have invested time and money in developing replica houses or apartments. They will do well to show their prospective customers the layout, levels of finish and furnished units how the residence will look and feel. This undoubtedly helps sell homes. In a speculative market - where real estate is traded - this was typically less important because the buyers in many instance were not the end-users and only had a short-term hold position in their mind before reselling it to another investor.
What we have always encouraged our developer clients to do is to build a show suite within the development itself.
With villa projects this is relatively easy but with a high-rise building - the typical unit that is finished within the building - it may not be constructed until that level of building has been reached.
If prospective buyers can safely access a building under development and look at a unit with actual finishes, this can bring huge confidence to them. They will be confident this unit will be similar to the one they want to purchase.
With the pricing set at a level below the anticipated completion value, it can help entice a customer to buy a unit under development as opposed to waiting for the completion of the project.
By Anjana Kumar
© Emirates Business 24/7 2009
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