Choosing the right off-plan deal

“Don’t cross the bridge ’til you come to it.”
— Henry Wadsworth Longfellow

The idea of buying an off-plan property has been polluted after many investors lost most of their money in the bubble burst that stormed Dubai in 2008–2009.

Many mortgage lenders and buyers found that the off-plan properties they purchased are worth less than their initial deposit upon completion.

However, the real crisis wasn’t that the completed properties were worth less than bought. It is the fact that many on-going projects were halted and investors lost all their invested money.

Investors had to resort to long years of pursuing lawsuits to try and get back whatever investment they had originally placed.

Developers and contractors went bankrupt. Real Estate Prices plummeted placing pressure on development and thus a vicious cycle ensued.

The market, unfortunately, follows a herd mentality. And only the people that actually did their research survived the financial crisis.

The main victims of the financial crisis were

1. Buyers who are uneducated in real estate investing
2. Emotional buyers who got carried away with an irrational exuberance

Note: Banks had a lot to do with creating the market disequilibrium of 2008. They had loosened lending policies and therefore driven demand which caused prices to bubble.

The off-plan market was unregulated, which added fuel to the fire. Buyers were selling off-plan properties in the parking lot literally hours after they had bought them from an exhibition. Of-course this is no longer possible after the regulations and laws that had been set in place.

Ever since, to encourage investors and help establish trust in the market the Dubai Land Department has introduced regulations to prevent price speculation, vet developers, and lower off-plan investment risk.

Buyers now need to pay a Oqood registration fee, and register any property transfer with the DLD. Developers now need to set up an escrow account before they can start selling off-plan properties which entails the developer attaining a title deed of the land, and approval from the Master Developer and other entities to start construction.

A lot has changed in the off-plan market in Dubai. You will need to familiarize yourself with today’s off-plan landscape before jumping in. Investing in an off-plan property requires meticulous research

1. You should not leave it to chance.
2. You should not follow the herd in the market.
3. You should not listen to common advice in uncertain times and uncertain circumstances.

If done properly, booking an off-plan property could be one of the most profitable investment decisions you have ever made.

Why purchase an off-plan property?

Entering the new-build market comes with a number of advantages.

1. It comes with a low entering point: you pay a lower price, ranging from 10 to 30% below similar ready-plan projects. This helps you achieve potentially higher returns from price appreciation.
2. Allows you to plan your finances in advance, lowering your chances of taking a bank loan to finance your purchase.
3. It is one way to make money in real estate passively without much involvement especially if you intend to sell your investment before construction is completed.

It’s not all roses and daisies however. You should do your research before investing a penny in this market.

How to assess an off-plan property?

People usually go with an investment based on the recommendation of someone they know, or an agent. In an emerging market such as Dubai, the word of mouth is usually the way to go with a lot of investments, and is often enough for a buyer to get convinced with a certain deal.

Again, assessing an off-plan investment should not be taken lightly, and you should certainly not rely on the common advice.

You should go through the entire process of evaluating an off-plan deal. You should:

1. Assess the community you’re investing in.
2. Assess the master developer.
3. Assess the developer in charge of the project you’re eying on.
4. Assess the project, its payment plan and your financial situation.

Assess the community you’re investing in.

Like the old-time real estate mantra goes: Location, location, location !

Every community has it is unique demand drivers, its own projects in the supply chain, maturity stages, amenities, and planned infrastructure works.

Prime communities are not always the most promising in terms of returns, same applies to affordable housing. You will need to look at indicators for price and rental trends in the area and be familiar with the local real estate cycle to decide if it is the right time to buy in this asset class.

If you are investing in an off-plan property with an objective to hold the property after construction and generate rental income, then you should seriously consider if the community’s infrastructure and amenities will be attractive enough for your target tenant.

Communities like Liwan (Queue Point) for instance have offered really affordable project prices for investors, however on the backside, the community still lacks the proper amenities like retail ( a mall is planned for construction still), and landscaping (it is still mostly barren). This might be a downside for cash-flow investors, as it will be harder to attract tenants. But on the other hand, from a price appreciation point of view, this means a larger potential for prices to increase once the community starts maturing.

Certain other communities might be expected to benefit from a future infrastructure work. For instance the Dubai’s Roads and Transport Authority (RTA) has announced that they will fast-track a US$1.36 billion expansion of Dubai Metro’s Red Line to connect to the Expo (Dubai World Center). The extension will pass close to certain communities like Discovery Gardens and Al Furjan, IMPZ, Green Community Village and Dubai Investments Park 1 that are likely to indirectly benefit from this added connectivity, so try to capitalize on this opportunity by researching investment opportunities in these areas.

On the other side of the city, the Green Line extension will start from existing Al Jaddaf station to Academic City. It will feature a rail line of 20.6 kilometre and 11 stations both underground and aboveground. This extension will serve urban developments such as Ras Al Khor industrial area (MBR city), International City and Silicon Oasis. The city is growing and where infrastructure is flowing is where a solid potential for price appreciation exists.

Assess the Master Developer

The Dubai government has done its due diligence before allowing master developers to take charge of whole communities to develop. That being said, Master Developers are not failure immune.

When Master Developers fail — They fail big.

One case is that of Golf City. Development on the project started in 2005 with an intended completion date of 2009. The concept behind Golf-City is a golf-course based community with up to 700 mansions planned. As of June 2014, the project was on-hold with only one completed development: a golf-course which was not yet operational.

The Master Developer is responsible for developing the entire community and not necessarily the project of interest. It is crucial to evaluate how well the master developer was at implementing community amenities and infrastructure.

Some master developers like Nakheel have gone above and beyond expectations, constantly upgrading the community amenities. For instance, Nakheel recently implemented dedicated bike paths interlinking their communities.

An example of a good master-development is Dubai South. The Master Developer owned by the Dubai Government, will be coordinating the construction of the expo 2020 pavilions space, extending the metro line and managing the construction of thousands of homes, offices and shops around the Al-Maktoum International Airport. Work is being executed according to schedule with the projects being delegated to elite developers like Emaar and DAMAC.

The tricky part however, is when picking the right Developer.

A master developer will have to approve every developer that will take on a project in their master development.

Think of it as a Manager-Employee relationship, the Master Developer is the Manager of a community, while the employees are the Developers. A weak manager will ultimately lead to the failure of a project, as is the case with incompetent employees.

Assess the Developer in charge of the project you’re eying on.

The Developer’s track record is absolutely critical when purchasing off-plan property.

Purchasing an off-plan property is purchasing its promise of delivery. And as we all know, when it comes to promises, these are rarely fulfilled precisely to what we have in mind (think timing and quality).

This is why, as a professional investor, you should always make your research about a certain Developer. Look at the quality of units they delivered in the past and their projected schedule.

1. Did the Developer deliver on time?
2. Did this Developer deliver the quality it advertised?

If the answer to one of these two questions is no, then I strongly urge you to reconsider your decision.

What type of units did the Developer construct the most? If a particular Developer usually delivered mid-income housing, do not expect luxurious housings to be on the plate. And even if it did, it would be rare that the end result will be up to the advertised quality standards.

Another point to keep in mind is quality of services offered during the first year of operation. During the first year of handover, the developer is still held liable for maintenance and operation issues, so double check to see if the developer was previously prompt in responding to issues, and if they were well taken care of. It would be a shame if your apartment, once completed, could have some defects that would render it uninhabitable making you lose precious time and money.

One other thing: Avoid virgin Developers at all cost, no matter how tempting the deal.

The infamous case of the 6 billion dollar project known as Dubai Pearl is the ultimate example of how NOT to invest in an off-plan property.

The fact that the initial Developer, who also happened to be the Master Developer in this case, advertised this project as a “city within a city”, with no history of other successful and well-recognized projects, should have been enough for investors to raise questions and ask for guarantees before investing their money

The project, announced in 2002, has been plagued by management problems and constant delays since its announcement. With no clear deadlines set by the Developer Pearl Dubai FZ LLC, and no clear plan on how to move forward with this mega project, multiple red flags were raised and ignored by the unfortunate investors. Investors failed to realize that it was a failed investment before a single brick was laid.

The initial Developer, along with the subsequent Developers that took over the projects in next few years, did not offer a clear refund plan. Buyers and investors alike invested their hard-earned money by following the exuberance born in the market, clouding their thoughts and their investment strategy.

Old and new Investors alike seem to constantly forget these crucial principles, as if the 2008–2009 crisis, and the Dubai Pearl scheme never happened.

Assess the Project itself

Having already done your due diligence about the community, its master developer and the project’s developer it is now time to evaluate the project itself.

Validating legal matters

Before doing so, go through the following legal checklist:

1. Is the real estate project registered with RERA?
2. Is there an escrow account for the project? What is the escrow account number and the name of the escrow account agent?
3. What is the percentage of completion of the project and the expected date of completion?
4. Is the developer registered with RERA? Does the developer own the development land or is there a development agreement between the owner and the developer?
5. Does the developer have the required permits and approvals from DLD and RERA to sell units off-plan in the relevant project?

Is it a good fit ?

Having validated the legitimacy of the project, you should take a step back and ask “how good of a fit is the project”. The ‘build and they will come’ philosophy no longer works. Question if the project fills a certain market gap, and whether there will be adequate demand for it once complete.

For instance, one good example of a developer doing their due diligence is the marquise square project in Business Bay. The developer Select Property Group (SPG) aims to provide mostly studio space to an area that suffers from an under-supply of studios.

With off-plan, it is all about predicting demand, and catering to it. Try to identify trends and certain market gaps and check to see if there is any project that is right up this alley.

How much of a price premium are you getting ?

Just like you would assess any ready property, you will need to estimate the current market value of your investment i.e. How much would it sell for in today’s market and how much of a discount am I getting, if any?

The sales comparable approach to market valuation is the following:

1. Find comps (short for comparables) or similar properties with a similar size, floorplan, number of bedrooms/bathrooms, amenities, floor level and view, that have recently sold in the same community or building cluster.
2. Adjust the prices for each positive or negative feature of the comps relative to the subject property. Through this detailed and systematic comparison, you would have adjusted for positive and negative property differences.
3. Estimate the market value of the subject property from the adjusted sales prices of the comps.

Note: This approach is only feasible to a certain extent, since the more unique the off-plan project, the harder it is to pair it to current comparable projects.

With the monopolykings.com platform you will be able to get a complete sales comparables breakdown of every single investment that is available on the market. This process will be completely automated for you so you can easily get an estimate of the market value of an investment.

As a rule of thumb, aim to find an off-plan property that is priced at least 20% below market and try to negotiate the price down another 10%. Keep in mind you will have to pay up to 4% of the purchase price as closing costs so negotiating at least 5% down is a must.

What does the payment plan entail ?

There are many payment plan configurations available on the market. Payment plans range from an 80/20 all the way to a 20/80. New payment plans are now including payment post-handover of 30/40/30 or 40/30/30. [with the first number being the total percent payment under construction, second number being the total percent payment upon handover, and third number (if any) being the total percent payment post-handover.]

When it comes to the payment plan, make sure that the payments are mostly bound to construction progress milestones and not fixed dates.

Also be careful of very attractive payment plans like a 20/80 or a 30/70. These payment plans come with an inherent financial risk. A lot of buyers jump in thinking: All I need is to figure out the funding for 20% or 30% of the purchase price and then when the construction is completed I’ll take out a loan to fund the rest of the amount.

But it is quite the common case that a lot of these same buyers might be in a worse financial position 2–3 years from now and might not be eligible for a mortgage, or won’t be willing to plunge further into debt. What happens is a run-on sale where many buyers compete to sell their off-plan investments before the handover payment is due, driving project prices down.

What’s your projected return on investment ?

Having already paired your off-plan investment to similar investments, you should be able to estimate a rental income range for your property.

• Ask the developer to provide you with an estimate of the service charges that you will need to pay.
• Use a conservative estimate then to calculate your net operating income and thus your cash on cash ROI.
• Finally generate bottom-line metrics like your total ROI, IRR and NPV to evaluate your investment and compare it to other alternatives.

Double check your SPA — it’s never late to pull out

One last thing, if all the above adds up well and you are convinced you want to go ahead and place your money on an off-plan investment, take your time and get legal advice to go through your Sale and Purchase Agreement.

The SPA can be a potential minefield for the unwary purchaser. Each document should be thoroughly reviewed before being signed and you should seek appropriate independent legal advice in order to be fully informed of the obligations into which they are entering.

More specifically check to see if your SPA includes restrictions on you selling your off-plan property. It is common to find some SPAs that force you to pay a certain amount of the total purchase price (e.g. 40%) before the Developer will approve a resale. Additionally some developers may set a MSP (minimum selling price) so as to not undercut their available primary sales.

Final Word

There are several contingencies to account for when investing in off-plan which mostly hinge on the factors we stated above. Make sure to keep all these factors into account once you locate an off-plan deal. Additionally, in case you are wondering whether you should invest in an off-plan unit vs a ready unit make sure to check this article.

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