Smaller developers join hands to save resources
Off-plan property launches in Dubai in the first quarter of 2018 have been few compared to the exceptional run of launches in 2017. The lack of an extension of post-handover payment plans and other incentives by developers has hit off-plan demand.
Off-plan sales in Dubai are down 37 per cent in the first quarter of 2018 compared with a year ago, with 4,564 off-plan sales registered during the period, according to data from GCP-Reidin, a consultancy. In value terms, off-plan sales worth an estimated Dh5.91 billion was transacted in Q1-18, down 46 per cent from Q1-17.
“The problem with incentives is that unless you continue giving them ad nauseum, you quickly run into the problem of diminishing returns. So, if you don’t keep offering increasing amount of incentives, off-plan sales start dropping precipitously which is what has happened this year. Post-handover payment plans were the industry’s equivalent of quantitative easing, the withdrawal of which tests the market,” says Hussain Alladin, head of IR and research, Global Capital Partners.
With larger players such as Emaar and Aldar joining hands to explore synergies, smaller developers also coming together to save on resources as off-plan financing recedes.
“We foresee this as a normal business cycle. In real estate development, you see a cycle of correction.
if you don’t keep offering increasing amount of incentives, off-plan sales start dropping precipitously which is what has happened this year Hussain Alladin, head of IR and research, Global Capital Partners
There is an increasingly wide gap between tenants and potential homeowners, which i believe smaller developers are under pressure to close Tauseef Khan, chairman at City Properties
Bigger and mid-size developers are racing to complete projects so they can cash in on the Expo 2020 euphoric selling spree Sudhakar Rao, chairman of Gemini Property Developers
We are in a phase where the market is adjusting to the new dynamic. Part of the pressure can also be related to delivery. As you come closer to the delivery of a project, your outflows peak, especially in cases where a developer commits off-plan incentives, it may lead to a period of cash flow management challenges. Those challenges may have to be met with debt. Also, some buffer funds need to be created keeping in mind there may also be some buyer defaults,” observes Sailesh Israni, director of Sun and Sand Developers.
Developers are unlikely to get back into off-plan overdrive in April before Ramadan and the summer lull sets in. They are likely to focus more on project completion.
“In an environment where offplan financing as a source of funding becomes competitive, then the only option left is a pooling of resources. On a smaller scale level, developers are increasingly starting to coalesce and entering into joint development agreements for the same,” reckons Alladin.
The off-plan frenzy last year has resulted in plenty of inventory in the Dubai market.
“Bigger and mid-size developers are racing to complete projects so they can cash in on the Expo 2020 euphoric selling spree. It brings the smaller developers under immense pressure and they are in a competition to come up with new marketing mix and USPs to make their properties more attractive for buyers. The survival of the fittest rule will prevail in 2018 and 2019,” points out Sudhakar Rao, chairman of Gemini Property Developers.
“Competition is won on timely delivery. Smaller developers have to charge prices which are lower than master developers to remain in the fray. As a result, there is constant pressure on their margins,” Rao adds.
With the risk of market oversupply and delays in delivery, smaller developers are under more pressure than larger developers who have a proven track record of execution and delivery.
“The property sector is going through a slowdown in terms of pricing and much of it is driven by the overall cautious sentiment among investors in light of global economic and geopolitical events. The affordable housing segment in Dubai remains massively underserved and out of bounds for most middle-income households. There is an increasingly wide gap between tenants and potential homeowners, which I believe smaller developers are under pressure to close,” says Tauseef Khan, chairman at City Properties.
With investors starting to recede in the absence of extended developer incentives, end-buyer are clocking in sales in communities where the infrastructure is more or less in place. “In a market where investors start to recede, then the buying that starts to emerge is one of end-users. End-users will only purchase in liveable communities and that is what you are seeing in Sports City and Jumeirah Village Circle,” comments Alladin.
Jumeirah Village Circle registered over 500 off-plan unit sales in Q1-18, and was among the only 2 clusters to record an increase over last year. Meydan was the other, driven by the Azizi projects, the Riviera and Victoria.
— deepthi@khaleejtimes.com