By Courtney Trenwith
Real estate firms and banks taking steps to prevent rapid on-sale of off-plan properties, common during boom time
United Arab Emirates developers and banks are taking steps to crackdown on “flipping”, the rapid on-sale of off-plan properties, in lieu of a formal ban.
The real estate industry is concerned that the quick turnover of properties still under construction causes prices to escalate based on speculation, while buyers risk being defrauded.
Flipping was particularly common during the Dubai boom - the period before the 2008-2009 downturn - and left scores out of pocket when scammers on-sold a single property to multiple people.
Head of research at real estate firm CBRE Middle East, Matthew Green, said the re-emergence of new residential developments meant the practice was making a comeback.
“It’s nowhere near the level which we had seen previously, but the fact we’re seeing off-the-plan launches is an indication there’s speculative activity back in the market,” Green said.
Emaar Properties, one of the largest developers in the UAE, has moved to reduce the practice by including a clause in contracts for apartments in its new residential project, The Address Fountain Views, in Downtown Dubai that prevents a property from being transferred into another name until a certain percentage of the total value has been paid to the company.
Brokers told Arabian Business the percentage was 30-40 percent, depending on the value of the apartment.
Emaar confirmed the policy but would not comment on the details.
"These policies are aimed at discouraging 'flipping' to sustain the robust growth of Dubai's real estate sector,” a spokesperson for Emaar said.
"As pioneers in developing master-planned communities in Dubai, and having handed over more than 31,000 residences, our focus is on encouraging long-term investors in our projects.”
Banks also want to cap the loan-to-value ratio of mortgages on off-plan properties at 50 percent, compared to 75-80 percent on completed properties, Emirates Banks Association chairman Abdul Aziz Al Ghurair said on Sunday.
Al Ghurair said banks could not identify speculators but they would make it harder for flipping to occur.
“Real estate developers like flippers because they make money; if you ask the banks we like genuine buyers who use it for his own home, that’s what will really stabilise society, [when] everybody has a house,” Al Ghurair said.
“Flippers, when they make money, is at the cost of the ultimate buyer.
“You cannot stop it completely [but]... we [will] ask them to put more money on the table. By putting 50 percent on the table it will limit the ability to leverage the bank’s money.”
Priyesh Patel, from Aston Pearl Real Estate, said the industry needed tougher regulation against flipping, but it was difficult to enforce.
Speculators already flouted rules set by Dubai’s Real Estate Regulatory Agency (RERA) by creating power of attorney documents that gave the rights to a property to the buyer.
Patel said the arrangement, which was legal, allowed the buyer to change contact details with the property developer, however the contract could not be transferred into their name until the developer’s required deposit had been paid.
That put the buyer at risk because they did not have legal ownership of the property and it could potentially be repeatedly “sold”.
Patel said the deals were usually done between investors who knew each other, but there were countless examples of buyers being burnt.
Despite Emaar’s attempt to prevent flipping, Patel said those who bought properties off-plan could still on-sell, including changing the owner’s name before the contract was completed, which usually took a week after signing the reservation form.
Patel said while the practice needed to be stopped, it was difficult for authorities to ban it.
“RERA has done everything they can,” Patel said. “You can’t stop someone selling what they own.”
While the regulations had not completely stamped out flipping, it had reduced the number of times a property was on-sold before it was completed, from four to five times during the boom years to about once, Patel said.
Green said any move to reduce flipping was “a good idea”. “It would limit speculation,” he said.
“[Flipping] facilitates rapid growth because people are looking to make very short-term gains instead of actually coming in and investing in the market long-term.”
Typical media nonsense. Most of the speculators are GCC nationals and nobody is going to stop them from making an easy buck.
The problem is the balance between buy-to-live people and buy-to-let-sellon-flip etc, a mature market has a much greater equilibrium between the two.
Frontier markets, will always suffer predominant speculation, when the end product is persistently sold off-plan to help fund construction. It is the same old trap, remembering that the only way Dubai's property market was driven to such dizzy heights in the first instance, was mass speculator activity.
We're back to the Malaysian formula, Singapore as well I believe. You buy a property and if you sell it within 5 years you pay a levy for doing so based on a sliding scale, weighted so that the rate is massive if the buyer's trying to sell within months, decreasing as he or she gets closer to the 5 year threshold.
Pay 40% before you can sell is no deterrent, would an Emaar sales person balk at a speculator paying 40% down up front, I think not?
Finalise the mortgage cap scenario and attract more end users, speculators blow bubbles!
Like all Ponzi schemes the Dubai property market will one day simply collapse because the new money has dried up. Emaar is just as guilty as the rest and the 40 per cent is a myth, because letters of credit are being used and trade offs with other investments in sites not being developed are common. Beware, Dubai property is nowhere near a safe investment. Probably never will be, given the repeat of mistakes.
In theory, you could apply your Ponzi scheme statement to every market in the world! How many property markets do you know of that have only followed an upward trajectory since their formation?
Could you also clear up a few questions I have in relation to your opinions.
What do you mean by 'new money'?
Emaar are guilty of what exactly?
What is a 'safe investment' in your opinion? Does such a thing exist or is it just relative to the individual person/group?
Much appreciated, thanks!
It still continues to amaze me that Westerners see Dubai as some sort of a temporary thing. Probably because in most Westerners' minds Arabs aren't supposed to build beautiful modern cities. The reality is Dubai and other cities in the region will continue to grow. Another reality is the only drying up is currently happening in the West. Accept and embrace this as this is the reality of the future.
I tink people are underestimating the number of cash buyers and how much exactly they bring into the country and invest in property deals. Bloomberg has a report on how there are so many Iranians and Russians (And also Syrians, Afghans, Egyptians etc) who buy property with briefcases full of cash. Needless to say, mortgage restrictions etc. wont affect them at all. Their countries may be a bit poor, but there are thousands of smart businessmen in those countries who think and buy in millions.
Certainly there are some cash buyers, but there are not minority. The evidence is that when the banks stopped lending the real estate market collapsed. So cash buyers are few :)
Then Iranian and Russians consitute less than 5% of the owner of properties in Dubai 80% indians and Pakistani FYI.
please check your statistics well
I can see lots of criticism here with no ground. Investors should do risk assessment on the country, on the industry, on the company you are buying from, if you do a wrong investment decision then it is your issue, don't blame UAE or the institute ( what you see is what you get ).
You know this is not a developed country and the rules and regulations are not very mature and in reture you get better return compared with a developed country subject to a good investment plan.
So the stupidity is dealt with accordinly :)
Leaving aside the guesstimates of how many cash buyers are out there, you seem to be suggesting that it is a good thing for the market for there to be a signficant number of foreign players who turn up with suitcases full of money. Allowing people to buy property in this way is tantamount to putting up a neon sign saying "please launder your money here". Most offshore jurisdictions worked out years ago that hot money can flow out just as quickly as it flows in, leaving the risk that property prices will be ramped up (again) to unsustainable levels, only for these cash buyers to pull their money out when the next big investment opportunity arises, leaving behind a legion of genuine buyers who have paid too much for their properties and a bunch of small-time speculators who got into the market too late. And a whole lot of trouble for anyone actually trying to live and make an honest living in the real Dubai economy.
Sadly it looks like people have very short memories.....
Collapse in 2008/09 was not specific to any country or city; even matured countries like USA, India etc. had faced the impact. I know also some people who made money in properties in Dubai. The only difference between these people and others was "GREEDYNESS". My only suggestion is "be cautious and be prudent".