50 per cent completion required before off-plan sales can begin
Having to first reach the 50% construction mark will put pressure on smaller players
Dubai’s developers may no longer be able to rush out with their off-plan sales — they will need their projects to reach the 50 per cent mark before they do so. The earlier requirement was for a project to be 20 per cent ready before sales could be launched.
The provision that developers must have paid off all the costs related to the land remains in effect. (The changes do not apply to government-owned real estate companies, according to informed sources.)
Such a move could have far-reaching consequences for developers — especially the smaller ones — as they would have to wait longer to get funds flowing back into their operations. But the latest changes would be for the greater longer-term benefit of the market, sources add. This would prevent those developers trying to get sales pushing projects with bare minimum down payments and extended post-handover instalment periods for buyers.
Last year had seen a flood of off-plan launches and sales, and with the majority of these projects expected to take three to five years to complete. Many had been expecting the pace to be maintained this year as well.
Leading developers such as Damac had been warning the market that these handover terms could have serious consequences if in a future downturn, buyers stopped payments and developers were left with “dead” stock.
How would more stringent requirements on off-plan launches play out? “The proposal to amend the developer’s law could spur consolidation among (smaller) investor-developers,” said Sameer Lakhani, Managing Director at Global Capital Partners. “A second benefit would be to improve confidence among investors that these projects would be completed — once you reach the 50 per cent mark, there’s every incentive to finish the rest.”
According to estimates by JLL, the consultancy, more than 95,000 residential units were launched in Dubai and with likely completion dates before end-2020.
“This is approximately twice the average demand over the past five years,” said Craig Plumb, Head of Research — Mena at JLL. “If all these units were to be delivered, there would be a likely oversupply and which would have a negative impact on sale prices and rentals.
Tightening the restrictions on the supply of off-plan units is a welcome response to concerns about a potential oversupply.”
Developers will also need to have a serious think about when they complete a project and how the sales are faring on it. Because any unit left unsold three years after construction will be subject to VAT.
Apart from oversupply, market watchers were also getting anxious about the quality of build of some of the new projects. They warned that cash-strapped developers could start cutting corners just to get the project off their hands.
“The new policy if it comes into full effect will reduce the systemic risk that is currently building up on the back of a few developers flooding the market with sometimes poor quality products at heavily discounted prices,” said David Godchaux, CEO at Core Savills.
“The (50 per cent requirement) will act as a screening mechanism for developers. They will now have to ensure they are in a stronger cash flow position to sustain the development risk without the help of capital guaranteed from off-plan sales.
“There will be less short-term pressure on property prices as some developers were competing to quickly attract buyers in the very early phases of their projects.” But the fact that the leading master-developers will not be impacted will ensure that a steady flow of off-plan launches will continue. As for private developers, they will now have to show more “skin in the game” in terms of putting in their own funds and on the project site. Some developers had privately been voicing concerns that the pace of off-plan launches last year meant a return of speculative buying in Dubai’s property market. For the greater and longer term good of the marketplace, this had to be nipped.
The 50 per cent cut-off effectively means that this will be the case.
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