I would like to take the opportunity to cover some considerations to be made by any investor considering buying into Off Plan Properties in Dubai with the Cityscape convention, the most popular real estate exhibition in the Middle East, now in full swing.
The current market situation suggests a positive outlook for off-plan properties scheduled for completion before 2020, with two years of price declines behind us and the "Expo 2020" impact fueling prospective demand.
As a general rule, off-plan investments are made to target higher investment returns while at the same time acknowledging some high risks in terms of handover dates, building efficiency and realistic rental rates after handover.
Most of those risks would be effectively restricted by rigorous due diligence and prudent selection of location (incl. master community), quality segment and developer, ultimately leaving the investor vulnerable to general market volatility or property and rental rates.
On the other hand, the property market in Dubai in general and the off-plan segment in particular have seen a major advance in professionalism, primarily due to a well-considered but contradictory tightening by RERA as the governing body of market regulations.
"Free" Leverage-The evolution of payment plans
Dubai's off-plan market sector has grown significantly in the post-crisis period, particularly with regard to payment plans. Most developers have allocated considerable financial means to propose deferred payments, often even until post-handover, in an attempt to deliver viable and affordable payment plans, especially in the lower segments of the market.
In turn reduced pre-handover capital investment drives the ROI, potentially making the off-plan option more appealing than ever before.
If you think off-plan is for you, consider investing heavily in the expansion of communities already developed. The good reputation of a community will still bleed into its newly formed period, stabilizing rents and property prices afterwards.
In addition, "Phase 2" projects will depend at least in part on their predecessors' infrastructure (access roads, schools, shops) and thus get a faster kick-off in the market for tenants.
Although it is no secret that the position of a property is among the factors affecting the total return, off-plan investments need some foresight in a fast-paced city such as Dubai. With the rapid growth seen in this city, it is of great importance that new hotspots with areas of high future housing demand are correctly predicted. It also takes into account general urban planning, the building and expansion of roads and interchanges, as well as the proximity to significant landmarks.
The off-plan investor is well advised to choose the time of his/her investment wisely, i.e. after the market has bottomed out, before or early in a new price cycle and possibly rent hikes, because leverage works both ways.
While I see some good potential in the current market stage using select off-plan property, I would like to point out that some prediction and prudence are needed for cross-border investments in general and in off-plan properties in UAE in particular.
As with any major investment in a foreign jurisdiction, before committing, you should make sure you have considered the following:
· Conservatively manage your cash flows: Distressed sales usually occur at the most unfavorable points in time, resulting in losses (especially if leveraged) almost inevitably.
· Hedge currency risks and consider the use of specialist services for the movement of capital. Compared to your local bank, the opportunity for cost savings is massive.
· Succession planning: Make sure that the local laws have an effect on your personal situation.
· Tax Planning and Structuring: Consider carefully the effect of the purchase of your property with regard to the tax status of your home and/or country of residence; do your homework well in advance if it requires the future introduction of investment vehicles.
The above points, in particular, are as dynamic as they are vital. If in doubt: make sure you get qualified and unbiased advice, never rely on broker or seller statements.
I'll illustrate some of the options available today in a corresponding post, presenting the economics of such a deal in a hands-on case study.