Attractive payment plans: is less really more?

With the launch of affordable housing projects, consumers should be wary of 'too-good-to-be-true' payment plans, writes Lubna Hamdan
Union Properties' $2.17b project will deliver 15,000 residential units
By Lubna Hamdan
Sat 16 Sep 2017 04:22 PM

Our first issue after last week’s Cityscape conference highlights the apparent return of Dubai ‘mega-projects’ – the colossal, $1bn-plus community mixed-use schemes attempting, in various ways, to change the face of real estate in the emirate. But, this time round, developers are seeking to provide consumers with property they can afford.

Take Union Properties’ $2.17bn (AED8bn) masterplan for a huge affordable housing project in Dubai’s Motor City, set to deliver 15,000 residential units. It is one of several substantial developments expected to fill a projected gap for mass low-to-mid market housing needs, ahead of the influx of workers arriving in the city ahead of Expo 2020. Preparations for the event are expected to create over 300,000 new jobs between 2018 and 2021.

In our magazine, Faisal Durrani, research manager at real estate consultancy Cluttons, warns that, at present, there are few areas in Dubai that cater to low-to-mid income households, especially if you take out districts and freehold communities such as Karama, Bur Dubai, Deira, International City and Discovery Gardens.

Durrani argues the average expat household in the UAE makes around AED200,000 a year, around four times less than the minimum criteria for securing a mortgage. This, he says, is an issue that needs to be addressed in new legislation or initiatives. He cites the fact that any projects priced at AED400,000-AED500,000 sell out instantly when launched because the market is so price-sensitive. This, he says, shows clear latent demand.

Furthermore, considering Dubai government’s plans to nearly double the city’s population from 2.8 million to five million by 2030, it is likely that housing prices will spike if demand is not met. According to a report by property consultancy Core Savills there has been a 50 percent annual shortfall in the number of units delivered for the past five years, so meeting demand is all the more important.

The good news, however, is that developers have clearly been listening to consumer and market needs, judging by the 186 percent rise in transactions of off-plan units at Cityscape 2017 compared to last year, according to figures released by the Dubai Land Department last week.

Experts believe the rise in numbers is in part the result of low entry-level prices and attractive payment plans being offered by developers. Some of these are cheaper than secondary market prices, with the majority of units delivered by 2020 expected to be below the AED1.2m ($327,000) price point, according to figures by Core Savills.

But this is where investors must be careful. Some developers at Cityscape have gone as far as to offer plans requesting only a 10 percent deposit upfront and 90 percent due 10 years after delivery. Property industry insiders are sceptical of these seemingly too-good-to-be-true payment promises, warning that they could do serious damage in the long run.

While big developers have the corporate funds and access to capital to offer attractive payment plans, smaller firms may not be able to keep up with the cost – particularly considering construction expenses account for 60 percent of a scheme’s total costs, experts told us.

One source said: “Say a scheme costs AED100 to build. You need AED60 to construct it. If you sell all of it and collect 10 percent, you only have 10 percent. Where is the other 50 percent coming from?

“We’re seeing payment plans three, four years after delivery. It worries us. Loose payment plans may result in a lot of projects going to banks and looking for big checks that may not be forthcoming.

“We could end up in a situation where we have big buildings with customers defaulting; that would not be good for the real estate market.”

Both developers and buyers, therefore, need to take caution when managing expectations, in order to avoid inflating the market. The core liability might lie with end-users, hence they need to do due diligence to know that developers are able to afford these schemes before putting their money in.

Because while it’s good to see more options available to consumers, in what is clearly an underserved segment, those options need to be realistic for everyone.

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