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Fri 14 Nov 2008 04:00 AM

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Developing at a discount

Dubai developers are being forced to explore innovative ways to entice buyers amid the credit squeeze.

Times have changed for Dubai's real estate developers. Once able to demand massive downpayments for off-plan properties years from completion, they are now being forced to explore innovative ways to entice buyers constrained by the credit squeeze.

As little as four months ago the property market in Dubai was a developer and investor paradise. Real estate projects were being launched with dizzying frequency as real estate companies tapped easy credit and speculators made handsome profits buying properties they would then flip weeks - or sometimes just days - later.

Now off-plan property prices are falling, demand is dwindling as mortgage availability dries up, and developers are being forced to look at innovative ways to kick-start the market and entice buyers back.

Developers are trying to make their products more attractive. People still want to invest — a more relaxed payment plan is the natural step.

The companies responsible for Dubai's rapidly changing skyline are being forced to introduce more flexible payment plans to make real estate in the emirate more affordable, and get the market moving again.

And with market conditions making it harder than ever for prospective homeowners to take out mortgages, some developers will face a struggle to stay in business.

"We've brought in payment plans to reach a wider audience, such as young professionals and young families who can't afford apartments at exorbitant rental rates," says Peter Penhall, CEO of, an online property broker.

"As the formal banking sector cannot support the property market, developers will find themselves under further pressure to offer flexible payment packages."

A massive advertising campaign ran across local television stations in Dubai last week promoting one developer's latest ‘buyer-friendly' financial package. A flat rate installment is payable every month for the first year and a half, with a down payment of 3 percent.

Just days after launching early last week, 80 percent of the 650 units had been sold - suggesting that some real estate in Dubai has been moved in range of families on mid to low level incomes.

UAE-based Union Properties (UP) launched a similar initiative in August for its Index and Limestone House developments near the DIFC financial district of downtown Dubai, widely considered an area of prime real estate in the city.

"We have eased the payment terms on some of the developments, as we do not expect someone to walk in with the full 65 percent required beforehand in today's market conditions," says Zaid Ghoul, chief financial officer at UP.

"We are therefore planning to distribute this 65 percent over two or three payments until handover to ease some of the pressure on buyers, given the slowdown in mortgage lending from the banks."

It is this slowdown in lending that is giving developers serious cause for concern as they try to sell the tens thousands of properties either finished or nearing completion across the emirate.

Arabian Business reported last week that UK lender Lloyds TSB had stopped offering mortgages on apartments in the UAE, and had reduced its loan to value ratio on apartments to 50 percent.

In the same week, it was revealed that HSBC now requires applicants to earn a minimum of 20,000 dirhams ($5445) a month to qualify for a mortgage.

Mortgage brokers argue that it is largely the big, international banks which are dramatically altering their lending criteria.

Jean-Luc Desbois, managing director of Dubai-based mortgage consultants Home Matters, says the concern over plummeting loan to value ratios is unwarranted, with people still able to borrow at least 80 percent against the value of their home if they have good credit histories.

UAE mortgage provider RAKBANK, for example, has not so far altered its lending policy - depending on the project, it still offers a 90 percent loan to value ratio.

Dubai's mortgage industry is naturally welcoming moves by developers to ease payment rules, especially given the more subdued market. Desbois feels a change in payment plans is necessary to flush out investors in the market.

"With banks dropping their loan to value and increasing their rates, developers are naturally trying to make their products more attractive," he says. "Despite fewer buyers in the market, people still want to invest - a more relaxed payment plan is the natural step."This was not the way in early summer. Before the first signs of strain emerged in Dubai's buoyant real estate market, it was a developer's playground. Knowing demand was red hot, companies would ask for up to a 70 percent down payment on a property that was years away from completion.

In November 2008, a plan like that would prove unworkable, as values fall in secondary property markets and developers and brokers face having a backlog of unsold property on their books.

"Six months ago you would not get a developer who was willing to negotiate: there was a price and you were ready to pay it, end of story," says Ryan Mahoney, managing director of Dubai property agent Better Homes.

Six months ago you would not get a developer who was willing to negotiate: there was a price and you were ready to pay it, end of story.

"Today developers are negotiating; today they are saying we will give you a discount or a preferred payment plan."

Lara Tabbal, director of project sales and marketing at Landmark Properties, says that although some smaller developers will not be able to afford staggered payment schedules for their clients - as they fund projects by selling units and don't have large reserves of equity - others will embrace the idea very quickly, with the days of big down payments being replaced by more manageable plans, equating to major discounts for homebuyers.

Emaar, the largest developer in the Middle East and the company behind the world's tallest tower, The Burj Dubai, announced last week that it was extending payments over five years on some of its properties, while also launching a scheme whereby potential buyers can rent a property before deciding whether to purchase it.

Emaar said the scheme was aimed at bridging "the current gap due to lower loan to value ratios offered by banks and financial institutions".

"Customers want something more flexible; they don't want to pay 50 percent for a property that is two years away [from being finished]," Tabbal says.

"Developers know clients are having a hard time getting financing. Not all developers have the cash flows to do this but generally we will see a lot more of this in the future."

Dubai-based developer Al Sayyah Investment is another group offering revised payment plans to prospective purchases.

It has introduced a 10 percent down payment on one 82-floor residential tower in Dubai Marina, with another 40 percent due when the project completes in the third quarter of 2010. The company is not asking for the remaining 50 percent until 2011.

Landmark, which provides real estate brokerage and consultancy services, has also teamed up with Amlak, the UAE's second-biggest mortgage lender, to boost sales at a project in Dubai Silicon Oasis.

Again, buyers are only required to put down an initial payment of 10 percent, and the rest of the financing will be provided by Amlak.

With more developers offering deals on new projects, together with the introduction of Dubai's escrow laws last summer, the cashflow of real estate companies will come under renewed pressure.

Billy Rautenbach, director of operations at Better Homes, which also advises developers on how to market projects, claims a number of small real estate companies operating in the emirate will struggle to meet payments amid tightening credit conditions.

"Developers are having to adjust to the market and adapt their marketing, sales and pricing strategies. We are assisting them with this," she explains.

"We will see a lot of consolidation with both agents and developers over the next three months," adds one experienced Dubai-based property broker, who did not wish to be named. "I don't see this as a bad thing - the strong will survive and the weak will disappear. Big is good right now."

At Landmark, Tabbal says the days of developers demanding hefty sums of money in advance are over, with many moving towards a simple payment structure over three tranches: when the property is bought, when it is half way from completion, and when it is finished.

Off-plan real estate constitutes a large a proportion of Dubai's property market, but in the new economic reality, developers already facing competition in a crowded marketplace, will have to display increasing flexibility if they are to survive.

Stephen 10 years ago

The current market situation hopefully will allow middle income earners to enter the property market, and weed out the speculators who most surely now will be hugely overextended and are partly responsible for the mushrooming in property prices. Developers will have to sharpen their pencils. Property should have real ownership, with the end users actually living in the properties they own, which is not the situation in Dubai right now. Most of us pay exorbitant rents instead, and this may be an opportunity for many to switch over from paying rents to becoming actual homeowners if they are able to retain their jobs.