With Cityscape convention – the Middle East`s most influential real estate exhibition – now in full swing, I would like to take the opportunity to cover some considerations to be made by any investor considering to buy into off-plan real estate in Dubai.
Seeing two years of price declines behind us and the „Expo 2020“ effect fuelling prospective demand, the present market situation indicates a good outlook for off-plan properties scheduled for completion before the year 2020.
Risk Management: Know Your Game
As a general rule, off-plan investments are made targeting higher returns on investment while at the same time accepting some elevated risks with respect to handover dates, building quality and achievable post-handover rental rates.
A thorough due diligence and prudent selection of location (incl. master community), quality segment and developer will limit most of those risks effectively, essentially leaving the investor exposed to the general market fluctuations or property and rental prices.
On the other hand, Dubai`s property market in general and the off-plan segment in particular have witnessed a considerable progress in professionalism, originating largely from a well-considered yet uncomprising tightening in market regulations by RERA as the governing body.
„Free“ Leverage – The Evolvement of Payment Plans
In the post-crisis era Dubai`s off-plan market sector has evolved substantially in particular with respect to payment plans. In an effort to offer competitive and affordable payment plans – especially in the lower segments of the market – most developers have allocated significant financial means to propose deferred payments, sometimes even until post-handover.
Reduced pre-handover capital commitment in turn drives the ROI, possibly making the off-plan option more attractive than ever.
Launching: „Phase 2“
If you think off-plan is for you, strongly consider investing into the extension of already established communities. A community`s good reputation will always bleed into its newly developed phase, stabilizing rents and – subsequently – property prices.
Moreover, „Phase 2“-projects can at least partly rely on the infrastructure (access roads, schools, shops) of their predecessors and thus get a quicker kick-off in tenant`s demand.
Location, Location, Location
Although it is no secret that a property`s location is chief among the factors influencing the total return, off-plan investments in a fast-paced city like Dubai require some foresight. With the rapid expansion seen in this city, it is of great importance to correctly predict new hotspots with areas of elevated future housing demand. The general urban development, construction and extension of roads and interchanges as well as proximity to important landmarks are also to be taken into consideration here.
As leverage works both ways, the off-plan investor is well advised to choose the time of his/her investment wisely, i.e. after the market has bottomed out, prior to or early within a new cycle of price and possibly rent hikes.
While I see some good potential in the present market phase using select off-plan property, I would like to point out that cross-border investments in general – and into off-plan property in particular – require some forethought and prudence.
As with any substantial investment into a foreign jurisdiction, you should be sure to have considered the following before commiting:
- Plan your cashflows conservatively: Distressed sales typically happen at the most unfavourable points in time, leading almost inevitably to losses (especially if leveraged)
- Hedge currency risks and consider to use specialized money transfer services. The potential for cost reductions in comparison to your local bank is enormous
- Succession Planning: Make sure to understand the implications of the local laws to your personal situation
- Tax Planning and Structuring: Carefully consider the impact of your property acquisition with respect to the tax status in your home and/or country of residence; do your homework well in advance if this includes the possible implementation of investment vehicles.
Especially the latter points are as complex as they are vital. If in doubt: Make sure to get competent and independent advice, never rely on statements made by brokers or sellers.
In a subsequent article I will highlight some of the options available today, presenting the economics of such a deal in a hands-on case study.