Buying off plan has its risks and rewards. The main benefit is typically a lower price. Developers usually offer between 10 and 30 per cent lower prices for off-plan and under-construction properties. The closer to completion, the higher the price (typically) becomes.
These days developers are luring buyers with increasingly attractive and flexible payment plans. “Book now with Dh5K” … “Pay just 10 per cent and move in.” “Pay 50 per cent now and 50 per cent two years after completion” … “Pay 1 per cent per month” … are some of the more aggressive advertisements seen recently on billboards down Sheikh Zayed Road or on propertyfinder.ae. And while some of the master developers still demand and receive up to 80 per cent during the construction process, the most popular payment plan these days is 50 per cent during construction and 50 per cent at completion. There are risks, however.
The most common issue with buying off plan is that your project will be delayed. It has been suggested that more than 50 per cent of projects launched since 2008 in the UAE have been handed over at least one year later than quoted. Some considerably more. Some have been cancelled. Unlike the heady boom days prior to 2008, off-plan payment schedules these days should be linked to construction milestones so the part of the risk relating to delayed handovers are somewhat mitigated. Still not great if you’re renting and planning to move into your new property.
The brochure and display suite look amazing, but will the developer cut corners and deliver a product that is less fabulous than expected? Good developers trade on their reputation and understand that the quality of their finished product will directly affect their brand and future sales. Others care less.
As a relatively new market, UAE real estate boom and bust cycles have been largely driven by hype and a herd mentality as opposed to fundamentals of supply and demand. This is changing as the market matures to a traditional end user / long-term investor-dominated market. Market risk, however, occurs in all markets across the world and when buying off plan you risk a general decline in real estate values between when you hand over your booking fee and when you receive the keys. Conversely the opposite is also true. If prices go up you can leverage big gains on a relatively small deposit.
Change of your financial circumstances
When buying a property off plan you need to pay 20 to 80 per cent during construction with the rest due at completion. Most common these days are 50/50 payment plans. If you plan to pay the whole amount in cash your concerns are limited to the aforementioned risk (which is plenty for most), but if you require a mortgage to complete, there is the risk that your financial circumstances may change. You might lose your job; interest rates might increase or the banks may alter lending policies. And even if you qualify for a loan, the bank may not lend you the funds you require.
To mitigate this risk, for selected developments you can apply to borrow up to 50 per cent of the purchase price which is preapproved at the time of application and is guaranteed to be paid at completion. So regardless of what happens to your personal financial situation; assuming of course you can pay 50 per cent in cash, you can be confident of getting the funds you need to complete the purchase. Please note that not all developers and projects are eligible. Every bank has its approved developer/ project list. Some will offer finance for off plan for selected projects, many will not. Talking to a qualified mortgage adviser before you take the plunge is a highly advisable first step.
For completed properties under Dh5 million you can apply to borrow up to 75 per cent of the property value (80 per cent if you are a UAE national). Which means that if you paid 50 per cent cash during construction you can take 25 to 30 per cent cash out. Furthermore if the property has increased in value it may even be possible to borrow 75 to 80 per cent of the increased property value and take even more cash out. This will require a mortgage reapplication and revaluation of the property but if the numbers make sense and you’d like to access some cash at low mortgage rates, it’s an attractive option.
Lukman Hajje is the chief commercial officer of propertyfinder Group.