UAE real estate: Off-plan or ready property, what are you planning to buy?
The secondary market has performed well due to falling prices and reduced down-payments
Of the 8,675 property sales transactions in the third quarter, almost 63 per cent were in the secondary market, an increase of 21.7 percent compared to the second quarter this year, according to Dubai Land Department. “If you’re looking at the secondary market today and the end user’s access to mortgage, now is the best time to buy, depending on your outlook on Dubai’s future,” says PP Varghese, partner and head of real estate strategy and consulting at Knight Frank. He talks about the resilience of the market, and says, “I suggest purchasing a unit in a good community in a good location because prices and mortgages are at their cheapest.”
Ready property appeal
A major advantage of the secondary market from an end user’s perspective is the certainty around construction delivery. Chris Hobden, head of strategic consultancy at Mena, Chestertons, says, “When buying something that’s completed versus off-plan, you know exactly what you’re getting in terms of the property’s overall quality and how it’s fitted out internally.” With a well-known developer, this is not usually an issue, but with a developer working on a project for the first time, it becomes more of a concern, according to Varghese.
Additionally, residential property prices have significantly come down so there are good deals in the secondary market. In the last 12 months, residential property prices in Dubai fell by 11.7 per cent, according to Cavendish Maxwell’s Q3 2020 UAE Property Market Report. “If you’re a cash buyer or in a position to get a mortgage, there are some potentially attractive deals to take advantage of in Dubai’s market,” said Hobden. The Central Bank of the UAE increased the mortgage allowance for first-time buyers in March 2020, allowing expats to borrow up to 80 per cent of their property purchase price and UAE nationals up to 85. This is an increase from 75 per cent and 80 per cent, respectively. Another advantage of ready properties is the possibility of immediate income from an investment standpoint.
“If you’re buying in the secondary market and the property is ready, you can rent it out or live in it immediately. Whereas in the off-plan market, you’ll have to wait one or two years before you see any return on it,” says Richard Waind, group managing director at real estate agency Better Homes.
Although residential yields in Dubai have declined at a faster pace than capital values, an investor can still get a gross yield of more than 6.5 per cent for an apartment. This is comparatively strong compared to other large international residential markets, according to Hobden.
Off-plan: Flexibility at a price
While the secondary market has enjoyed more attention in recent months, there are unique advantages to purchasing an off-plan property. “One of the biggest attractions of the off-plan market is the flexible payment plans and lower down payment,” explains Waind.
“In the secondary market, as a first-time buyer you’re looking at a down payment of 20 per cent. For a second-time buyer if you’re buying with a mortgage, it’s 40 per cent. Whereas if you’re buying in the off-plan market, you can often pay a down payment of five to 10 percent.” The ability to choose from different units is another advantage, according to Hobden.
When it comes to post-handover payment plans, these don’t usually come at a discount. “The prices for units [with post-handover payment plans] include the financing charges that the developer is taking on. So the developer is becoming a bank in this instance and offering the unit at their own risk, and that is not necessarily at a lower cost than what banks normally charge,” says Varghese.
A developer typically looks at a return of anywhere between 18 and 20 per cent on their equity and would expect their return to be on a longer time horizon by offering this payment structure. Therefore, it’s never going to be as cheap as what banks offer, which is 2.5 to 3 percent annually, according to Varghese. “What the developer is offering is flexibility in choosing your finances, in the sense that you’re not stuck with a bank giving you a mortgage,” he says. This flexibility still serves many types of buyers, including those looking to buy their second or third units.
It’s also a viable option for self-employed people who have cashflows coming in, first-time buyers who don’t qualify for a mortgage, and those leaving the country in a few years and who might not want a financial commitment that ties them down.
However, developers have largely held back from launching new projects this year, partly because they’re looking to sell newly completed units. One of the few projects that were launched this year was the Elan neighborhood in Majid Al Futtaim’s Tilal Al Ghaf, where homes were sold out within a few days.
“When you see a good off-plan launch in the market, it’s getting snapped up very quickly. However, the market has been driven in the last six to nine months more by domestic end-users who are looking for turn-key property that they can live in,” says Waind. Waind expects a peak supply of new properties to come into the market over the next 12 months. Hobden, too, expects off-plan projects to re-appear in 2021, when there is more certainty. “I think developers will want to take advantage of improvements in the local economy against the backdrop of Expo2020 Dubai.”