Equilibrium now further away for Dubai market

Developers in Dubai will be happy with their 2017 results, with over 70% of all transactions in Dubai in 2017 being in the off-plan space, their efforts have been well rewarded.

In a year where over 69,000 real estate transactions were recorded, with a total value exceeding Dh285 billion, real estate transactions in 2017 eclipsed the 41,776 deals achieved in 2016 which represented a total value of Dh259 billion.

Winning the hearts and minds of real estate investors has never been easy. In recent years, certainly post 2008, buying off-plan would have been viewed with more circumspection as the prospect of buying finished property that would able to yield cash flow in the form of rental income virtually immediately would have been considered a less risky prospect than relying on developer platitudes regarding construction timelines.

In addition, attracting the buyers in the affordable segment has always been challenging as the purchaser tends to be more pragmatic, governed more by fiscal realities than emotion or ego. Developers needed to broaden and deepen their customer understandings and develop greater empathy for a segment that had really been neglected in the past.

So, the foray by developers into the affordable segment was accompanied by an increasingly attractive array of successfully marketed financing offers which were designed to garner an increasing proportion of available investor capital into the off-plan property space. After all, new customers have different needs requiring new strategies and tactics.

While these new tactics may have been treated with suspicion in the past, the industry has matured from the heady days of flipping, speculation, false promises and minimal accountability with the regulatory changes imposed on developers to ensure the rights of investors are protected making offerings in the off-plan space appear less risky in nature.

So, faced with a market nervous about global and regional geo-political and economic events, the imposition of a VAT, the distraction of alternative “new world” investments such as cryptocurrencies, along with burgeoning oversupply in the highly competitive and lower margin per unit affordable segment, developers, requiring greater sales volumes to achieve financial viability, needed to get financially creative to make their affordable offerings even more affordable and accessible for end users and financially more attractive for investors.

Inevitably, the amount of capital shifting from the traditional secondary market to the off-plan market created in a capital allocation imbalance, resulting in declining demand for finished properties. Interestingly, capital allocation was really the issue, as supply was quite healthy in 2017, with mortgages financing over 50% of transactions. It wasn’t that long ago that mortgages made up less than 30% of total transactions, extremely low by global standards.

So, as we enter 2018, we are faced with a familiar situation. The market is, once again, is moving further away from the equilibrium that we are all seeking.

The focus of developers to satisfy the requirements of an emerging affordable segment has been overdone, putting pressure on prices, yields and growth in across the industry.

To suggest a reversal or redirection of capital to the more expansive segments is likely in the short term is mere wishful thinking. The only way to address the issues facing todays market is to ensure that the long awaited and much speculated upon Expo inspired surge in demand transpires or to find other ways to expand the capital pool.

One initiative to do just that is in its final stages of planning. Looking to attract an even greater number of overseas investors, a series of roadshows will be held targeting key overseas markets such as India, China, Russia and the USA with the sole purpose of making investors in these countries to understand the benefits of investing in Dubai.

The schedule for the events is close to completion with events in Amman and Kuwait scheduled for late March to be followed by Cairo in April, Beijing in May, and Moscow in July before visiting London in September, Chicago and Dallas in October and wrapping up the tour in Mumbai does in December.

The importance of initiatives such as these cannot be overstated and The Dubai Land Department, realising the importance of increasing industry demand is pushing hard with this initiative.

Despite UAE investors leading the 2017 nationality rankings of investors in Dubai real estate, Indian investors continue hold second place and remain extremely important to the industry. Saudis came in third place followed by the British, who have dropped down the rankings in recent years due to uncertainty around Brexit and a decline in value of the British Pound. The Chinese are emerging rapidly as active investors in Dubai and still hold the greatest potential for foreign investment.

Foreign investors, almost 23,000 in number made approximately 30,000 transactions worth Dh56 billion in 2017. The local market’s reliance on foreign investment continues and, outside the Gulf region, there are huge opportunities to increase the awareness of what benefits the Dubai market continues to offer, not least of which, is the potential yields of 7-11 percent which are unheard of in much of the developed world.

So, the race continues … to win the hearts and minds of the global investment community.

ESCROW AND HOW IT CAN PROTECT YOU

By Mohanad Alwadiya
CEO, Harbor Real Estate
Senior Advisor & Instructor, Dubai Real Estate Institute

There are not many people who understand the concept of escrow and how this legally binding arrangement can provide a substantial level of protection for investors.

In its simplest form, an escrow can be described as a legally recognised financial instrument held by a third party (typically a bank) on behalf of two other parties (typically a buyer and a seller) who have agreed to conduct a particular transaction in accordance with certain conditions. Funds are provided by the buyer and held by the party (bank) providing the escrow service until it receives the formal advice that certain previously agreed obligations of the seller have been fulfilled upon which time, the seller can receive funds to the amount specified in the agreement between the seller and buyer.

The use of escrow accounts by Dubai developers has been mandated by law for the specific purpose of protecting the prepayments made by buyers for properties that are being bought off-plan. This limits developers from gaining access to funds until certain construction milestones are completed helping to ensure developers are not misappropriating funds provided in advance for purposes other than which they are intended.

Anybody can open an escrow account but not anybody can open an escrow account for the purposes of property development in Dubai. The developer must first be registered as a bona fide developer with the Real Estate Regulatory Authority (RERA) in Dubai which involves the provision of an expansive array of documents ranging from those which establish the bona fide nature of the developer including details of its officers and solvency,  Title Deeds proving ownership of the land to be developed, No Objection Certificates (NOC) from relevant parties such as the Master Developer to performance guarantees backed by a financial institution and all planning and financial details regarding the project.

RERA requires that the land subject to development should be fully paid and a title deed should be issued in the name of the owner.  Where the owner of the land cannot register as a developer, RERA permits the land owner to enter into a property development contract with an existing registered developer to develop the project on behalf of the land owner.  The property development contract however must be approved by the senior legal adviser of DLD to be accepted by RERA.

Only when a developer is recognised as a “registered developer” with RERA can they apply to RERA to open an escrow account.  When selling off-plan, the developer must ensure all proceeds of sale of the units are deposited into the escrow account and are used solely for the purposes of construction of the project.  Failure to comply with the Escrow Law can lead to hefty fines or criminal charges which may result prison sentences being administered. Once the developer has submitted all the required documents to RERA and the developer is granted the authority to sell units off plan RERA will issue an NOC to allow the developer to open an escrow account with an authorized bank in the UAE.

Obviously, the bank which will be providing the escrow service needs to understand all the details of the underlying agreement to ensure that it acts in accordance with the provisions of that agreement. In this way, the bank can help protect the buyers pre-paid funds by referring and strictly adhering to the conditions of the underlying agreement

But while the introduction of escrow as a legal requirement for developers has helped safeguard the funds of off-plan investors, there are other steps that investors must take to provide additional self-protection.

First, buyers need to make sure you are dealing with a reputable developer, regardless if the developer is registered with RERA. Ask around or seek professional guidance, as those in the industry have a good appreciation of who the reputable developers are.

Warranties and any quality assurance policies should be discussed in detail. Have the Sales and Purchase agreement reviewed by a professional, to ensure you have legal recourse should any quality issues arise and make the effort to exercise your right to inspect (snag) your property and report any legitimate issues to the developer for rectification. Items which can be remedied in the short term should be fixed immediately and remember, once you have taken ownership of the apartment, the developer is obliged to fix any issues that may arise for a full 12 months following transfer of ownership.

wolfofrealestate

H1 2015… and where are we?

Mohanad Alwadiya, MD of Harbor Real Estate & Instructor at
the Dubai Real Estate Institute, the Official
Training & Certification Arm of the Dubai Land Department

For the past 6 months, headlines have been making many and varied references to the Real Estate correction in Dubai. This is not surprising as yes; indeed, Dubai’s Real Estate industry is in the midst of a correction. For many, the term “correction” is viewed with suspicion and trepidation, particularly those with a more tactical, less strategic, short term point of view. For those who are taking the long term perspective, the term “correction” is viewed with anticipation as the term refers to the elimination of systemic issues and making the necessary adjustments to deal with impacts of external issues on the efficient operation of the real estate market itself.

There is no doubt that a “correction” was overdue. 2013 will long be remembered as Dubai’s comeback year as the total value of Real Estate transactions reached AED 234 Billion, a 52% increase in the prior year which was clearly unsustainable as witnessed when the correction began in 2014 when AED 218 Billion worth of real estate assets were sold, a reduction of over AED 16 Billion on the prior year. At the time of writing, just over AED 63 Billion worth of transactions had taken place during 2015 indicating that the market is well and truly into its correction phase.

The market definitely benefitted from high levels of liquidity during 2012 and 2013. Capital inflows seeking safe haven from regional conflicts flowed strongly, however, they were sure to weaken and have. Geo-political events such as the wrangling over the Ukraine and  subsequent economic sanctions imposed on Russia by the West meant a rubble which was declining rapidly in value made investing in Dubai an increasingly expensive proposition for Russian investors who historically have been prevalent amongst the investing community.  In  addition,  changes  to mortgage  laws  also  dampened  the availability of capital for those investors wishing to use  leverage  to  capitalize on attractive property valuations and the  promise  of  high  and  sustainable rental  yields.  A slew of new projects being launched as a result of renewed developer optimism also placed pressure on liquidity levels and, eventually, prices market-wide.  Initially, launches were made with prices for off-plan units consistent and supportive to prices for completed units. However, with each additional launch competition for the investor Dirham intensified, leading to a gradual reduction in prices for off plan units making the risk reward equation more palatable for off-plan units versus completed units.  In addition, the shift of developer focus in response to the call for more affordable housing also meant that investors gravitated towards this, perhaps the most important structural correction in the market to date.

The  number  of  new  launches has been impressive, leaving many to question  whether  over- exuberance on  behalf  of  developers  will  result  in a  significant  oversupply.  Calculating optimal supply levels, particularly when emerging from a recessionary period, is particularly challenging. It depends on an accurate estimation of demand for real estate assets which will emanate from population growth which, in Dubai’s case, will be largely driven by overall economic growth going forward. In addition, it needs to comprehend a lag effect from the time that conditions conducive to development are identified by developers and when properties are completed and are released onto the market.

We at Harbor take, at minimum, a 5 year view when looking at equilibrium or imbalances in the market. When taking into account the nature of the markets resurgence, the strong growth in fundamental economic drivers such as tourism and trade, the levels of investment into infrastructure and initiatives and stakeholder commitment to sustainable growth, we believe that, while inventory levels may spike in the interim, they will not be excessive at the end of our 5 year forecast period. There will be around 11,000 villas, 7,500 townhouses and 35,000 apartments delivered between now and January 2020. While this may seem a lot, remember that we are a entering period where demand for properties, particularly those which are affordable, is expected to rise significantly and, given average current occupation rates are around 80 – 85%, there is not much margin for error in terms of satisfying expected demand.

Put simply Dubai needs people to support an economy that is expected to grow at an estimated 5%+ annually for the remainder of the decade and to deliver initiatives such as the 2020 World Expo. The Expo alone is expected to generate an additional 270,000 jobs and drive demand for housing and commercial facilities that, by and large, don’t currently exist. Much of the city’s planning comprehends the number of people living in the emirate to grow to 3.4million people by 2020, a 7% annual increase from today’s population of 2.25million.

There is no doubt that a stabilized real estate market will provide a much better launch pad for what will be a period of significant economic and commercial activity over the next 5 to 7 years. The structural shift towards more affordable housing will not only serve to accommodate the expected rapid population growth associated with the 2020 expo, but also serve as an important factor in the development of the Dubai economy overall.

Every emerging economy needs to develop a strong middle class as its expansion is critical to growing a sustainable economy and developing resilience in the face of external financial and economic shocks. In addition, for Dubai to compete effectively on a regional and global basis, it needs to ensure that the cost of doing business in the emirate does not position it as an outlier when entrepreneurs or corporations are considering alternatives for their operations. When taking this perspective, the correction could not have come at a better time.

mohanad_propertyweekly

Property Weekly

Escrow law protection

With the recent flurry of new developments in Dubai, investors and potential owner-occupiers have been asking me how much protection is provided for the funds they are paying developers in advance. The conversation invariably turns to the concept of escrow and how this legally binding arrangement provides substantial protection for investors.

In its simplest form, an escrow can be described as a legally recognised financial instrument held by a third party (typically a bank) on behalf of two other parties (typically a buyer and a seller) who have agreed to conduct a particular transaction in accordance with certain conditions. Funds are provided by the buyer and held by the party (bank) providing the escrow service until it receives formal advice that certain previously agreed obligations of the seller have been fulfilled, upon which time the seller can receive an amount specified in the agreement between the seller and buyer.

The use of escrow accounts by Dubai developers has now been mandated by law for the specific purpose of protecting the prepayments made by buyers for properties that are bought off-plan. This limits developers from gaining access to funds until certain construction milestones are completed, helping ensure developers are not misappropriating funds provided in advance for purposes other than which they are intended for.

Anybody can open an escrow account but a developer must first be registered with the Real Estate Regulatory Agency (Rera), which involves providing an expansive array of documents, ranging from details of its officers and solvency, title deeds proving ownership of the land to be developed, and no-objection certificates (NOCs) from relevant parties such as the master developer, to performance guarantees backed by a financial institution and all planning and details about the project.

Rera requires the land subject to development to be fully paid for and a title deed issued in the name of the owner. Where the owner of the land cannot register as a developer, Rera permits the owner to enter into a property development contract with an existing registered developer to develop the project on behalf of the land owner. The development contract, however, must be approved by the senior legal adviser of the Dubai Land Department to be accepted by Rera. Only when a developer is registered with Rera can it apply to open an escrow account. When selling off-plan, the developer must ensure all proceeds of the sale of the units are deposited into the escrow account and are used solely for the construction of the project. Failure to comply with the escrow law can lead to hefty fines or criminal charges, which may result in prison sentences.

Once a developer has submitted all the required documents to Rera and is granted the authority to sell units off-plan, Rera will issue an NOC to allow the developer to open an escrow account with an authorised UAE bank.

The bank that will be providing the escrow service needs to understand all the details of the underlying agreement to ensure that it acts in accordance with its provisions. In this way, the bank can help protect the buyers’ prepaid funds by referring and strictly adhering to the conditions of the agreement.

But while the introduction of escrow as a legal requirement for developers has helped safeguard the funds of off-plan investors, there are other steps that investors must take to provide additional protection.

Buyers need to make sure they are dealing with a reputable developer, regardless if it is registered with Rera. One positive effect of the global financial crisis was that many suspect developers were exposed and forced out of business. Seek professional guidance, as those in the industry know who the reputable developers are. Ask the opinion of those who have transacted business with the developer.

Ask the developer what measures have been taken to ensure the end product is built to an acceptable standard and inspect buildings already completed by the developer. Warranties and quality assurance policies should be discussed in detail. Have the sales and purchase agreement reviewed by a professional to ensure you have legal recourse should any quality issues arise.

Upon completion you have the right to inspect your apartment and report any legitimate issues to the developer for rectification. Items that can be remedied in the short term should be fixed immediately. Remember: once you have taken possession of the apartment, the developer is obliged to fix any issues that would arise 12 months following the transfer of ownership.